Take Advantage of Low Mortgage Rates and Higher Home Values

When mortgage rates decrease, some people see this as the perfect time to either purchase their first home or buy another property. In addition, rising home values can provide current owners with additional equity for a down payment on their next place. But buying a home isn’t the only option in this scenario.

You might be comfortable in your current home, but at the same time, you want to take advantage of cheaper rates and rising home values. If so, it might make sense to refinance your current home.

What Is the Purpose of a Refinance?

Refinancing involves applying for a new mortgage to replace your existing one. Some people refinance with the sole intent of getting a lower mortgage rate, which can lower their monthly payment.

Also, some people refinance their mortgage to eliminate mortgage insurance. Lenders often require this insurance when buyers purchase with less than 20% down.

If you have a conventional loan, your lender will remove private mortgage insurance (PMI) once you have 22% equity. But with some FHA home loans and USDA home loans, mortgage insurance is for life. To remove this expense, you must refinance the mortgage.

One benefit of rising home values is that you’ll achieve 20% equity faster. In which case, you can refinance, remove mortgage insurance and potentially save hundreds each month.

What Is a Cash-Out Refinance?

Along with getting a better rate, some people take advantage of rising home values by refinancing and borrowing cash from their equity.

This practice is known as a cash-out refinance. You’re typically able to borrow up to 80% of your home’s equity. You’ll then receive a lump sum at closing, which you can use for many purposes.

One common use of a cash-out refinance is a home renovation. You can use cash from your equity to improve your property or make your space more comfortable.

Also, a cash-out refinance is useful for debt consolidation. If you have high-interest debt such as credit card debt or personal loans, the money you receive can pay off these balances. Keep in mind that debt consolidation doesn’t eliminate the debt, it simply moves it. Yet, many people prefer consolidation because the interest rate on a cash-out refinance is usually less than the interest rate on a credit card.

But while an option, only use a cash-out refinance for debt consolidation if you’re able to control spending. If you pay off a credit card and then re-accumulate the balance, you could potentially double your debt.

Another thing to keep in mind is that cash-out refinancing increases your mortgage balance. However, even if you borrow money from your equity, your new mortgage balance might be less than your original mortgage balance. You might also qualify for a lower mortgage rate, plus there’s the option to extend your mortgage term.

So even when borrowing from your equity, your new mortgage payment might still be lower than your original mortgage payment.

What to Know About Cash-Out Refinances?

Even though you’re able to borrow up to 80% of your equity, you might get approved for less.

The amount you’re eligible to receive depends on how much debt you’re currently carrying and your income. Underwriters have to weigh these factors when determining how much you can afford to borrow, especially since your mortgage balance will increase.

Also, your credit score determines whether you’ll qualify for refinancing. To improve your approval odds, pay your bills on time, pay down credit card debt and don’t apply for credit unnecessarily. These measures can help you maintain a high personal score.

Final Word

Mortgage interest rates fluctuate, so if you’re thinking about refinancing or a new purchase, act now before rates increase.

To learn more about your refinance options, contact the loan experts at Blue Spot Home Loans. Fill out the contact form or give us a call today.