Gateway | Historically Low Rates Make This a Prime Time to Refinance

Over the past five decades, 30-year fixed-rate mortgages have reached highs of 18.63%, in 1981, and lows of 3.31%, in 2012. Today, mortgage rates hover near historical lows. In fact, more than half of all mortgage holders have scored rates between 3-4.9%, according to data from Freddie Mac’s Primary Mortgage Market Survey (PMMS). This makes it an ideal time to consider a refinance of your current home loan.

Possible Benefits of Refinancing Your Home

Some of the possible benefits of refinancing include:

Cash-out refinance: pay for medical bills, start a new business, or go on your dream vacation.
Lower your monthly payment.
Watch your principal come down faster.
Shave time off your loan period by switching from 30 to 15 years.

How Cash-Out Refinance Works

If you are approved for a cash-out refinance loan, you replace your existing mortgage with a new one, usually at a lower rate. If you have enough equity in your home, you can sometimes borrow against it as part of the new loan amount. Here’s an example of how the math works:

A homeowner’s property is worth $300,000 and they owe $200,000 on their mortgage loan. This means that the home has $100,000 in equity — the difference between what they owe and the value of the home. They need $30,000 to renovate their kitchen. A cash-out refinance loan of $30,000 raises their loan amount to $230,000 — what they owe on their old loan plus the cash-back amount borrowed.

While the repayment amount increases, the homeowner essentially gets the money for their renovation at the same low rate as their new mortgage. Often, you can get a lower payment thanks to your lower interest rate.

Ways to Use the Cash

You probably don’t think you need any help spending extra cash. That being said, before diving into refinancing your home, it’s a good idea to plan out exactly what you’ll use the extra money for to make the most of your hard-earned equity. Here are some ways others have maximized this rare opportunity:

Fix structural issues with the home, such as burst pipes or a cracked foundation.
Add on to your home to accommodate your growing family.
Take a dream vacation to visit parts of the world on your bucket list.
Pay off your credit card debt.
Buy an investment property to generate additional equity or for rental income. *

Typically, the lender doesn’t restrict what you use the loan for. That’s why it’s so important to use the money wisely. For example, high-interest debt might be a bigger priority than a month in Bali.

Consider All the Factors

Before paying off your credit card debt or adding an inground pool to your property, do the math on your mortgage refinance. Include the closing costs and calculate your annual savings to make sure it’s worthwhile.

Depending on your previous interest rate and how much you still owe on your home, you may be able to get both a lower rate and a shorter term. Many people who have a 30-year loan decide to convert their loan period to a 15-year loan. With the current low interest rates, this may be a smart way to maximize your refinance.

Other Options

If you don’t want to pay for the costs of a cash-out or regular refinance, there are other options. A home equity loan or a home equity line of credit is an attractive alternative. With a HEL or HELOC, you are taking out a line of credit based on your equity. You repay this separately from your mortgage, so it’s important to budget carefully for your repayment plan. With a HELOC, your home acts as collateral, just as it does for your mortgage. However, you can withdraw money as you need it, which is great for controlling cash flow if you’re good about paying it off quickly.

The interest rates on HELOCs are usually adjustable. Make sure your HELOC comes with a lock-in option that lets you freeze your interest rate to the current low rates. With your home on the line, it pays to be as strategic as possible.

What’s the Best Opportunity for You?

Consider the following questions to determine whether refinancing your mortgage loan is a good idea:

Do you want the money in a lump sum?
- If yes, go for a HEL or cash-out option.
- If no, try a HELOC.
What is the all-in cost of the refinance?
Include closing costs, total interest costs, and fees.

Interest rates on a cash-out refinance are often lower than home equity loans or credit lines. However, closing costs might be higher.

Note of Caution

Many borrowers require minimum credit scores to qualify for a cash-out refinance loan. Your loan-to-value ratio is also important. The LTV is the mortgage amount divided by the home’s value, determined by an appraisal. The maximum is around 85%. For example, for a home appraised at $100,000, you owe $86,000. Your LTV ratio would be 86%, which exceeds the minimum threshold.

The cash-out resets the loan term. If you choose a 30-year term, you’ll likely pay more total interest over the life of the loan.

The Bottom Line

Interest rates aren’t likely to go much lower. If you’ve been waiting for the right time to borrow money, now is a great time to invest in your future.

A cash-out refinance helps you get a great rate that’s fixed for the life of the loan and still have money to accomplish some of your financial goals. Lower monthly payments give you more room in your budget to enjoy your life or pay down your mortgage faster.

Speak with a reputable lender regarding your options to determine which refinance opportunity works bests for your family.

*Gateway does not guarantee investment homes will generate any equity or additional income and this is not financial investment advice.