Category: Refinance

Should You Refinance Your Mortgage? Key Questions to Ask Yourself

Posted on by First Western Trust Bank

Refinancing your mortgage can be a smart financial move, but it’s not a one-size-fits-all solution. Whether you’re looking to lower your monthly payments, shorten your loan term, or tap into your home’s equity, it’s essential to weigh the benefits and potential drawbacks. Here’s what you need to know to decide if refinancing is right for you.

Why Consider Refinancing?

Refinancing replaces your current mortgage with a new one, ideally under better terms. Here are three common reasons people choose to refinance:

  1. Lowering Your Interest Rate
    If current rates are lower than what you locked in on your existing mortgage, refinancing could save you thousands over the life of your loan. Even a 1% decrease in your rate can significantly reduce monthly payments.
  2. Shortening Your Loan Term
    Switching from a 30-year mortgage to a 15-year term can save on interest payments and help you build equity faster. However, this typically comes with higher monthly payments, so it’s important to ensure the change aligns with your budget.
  3. Accessing Home Equity
    A cash-out refinance lets you borrow against your home’s equity, giving you funds to pay off debt, make renovations, or cover major expenses. Keep in mind, this increases your loan balance and may extend your repayment period.

Pros and Cons of Refinancing

Refinancing isn’t without its trade-offs. Let’s look at both sides:

Pros:

  • Potential Savings: Lower interest rates can mean substantial savings over time.
  • Improved Cash Flow: Reduced monthly payments free up funds for other expenses.
  • Debt Consolidation: Use home equity to consolidate higher-interest debts.
  • Faster Payoff: Shorter loan terms help eliminate debt sooner.

Cons:

  • Closing Costs: Refinancing isn’t free. Expect to pay 2-6% of your loan amount in closing costs.
  • Restarting the Clock: If you refinance to a new 30-year loan, you might pay more in total interest.
  • Equity Risk: Cashing out too much equity can leave you financially vulnerable if home values drop.

How to Calculate Potential Savings

Understanding the financial impact of refinancing is key to making the right decision. Here’s a simple way to estimate your potential savings:

  1. Determine Your New Monthly Payment
    Use an online mortgage calculator to estimate your new monthly payment based on the proposed interest rate and loan term.
  2. Compare Closing Costs to Savings
    Add up the total closing costs for the new loan. Then calculate how long it will take to recoup those costs by dividing them by the amount saved each month. For example, if closing costs are $4,000 and you save $200 monthly, it will take 20 months to break even.
  3. Evaluate Long-Term Benefits
    Look beyond the break-even point to assess the total savings over the loan’s life, including any reduction in interest payments.

Steps to Start the Refinancing Process

If refinancing seems like a good fit, follow these steps to get started:

  1. Review Your Credit
    A strong credit score improves your chances of qualifying for the best rates. Check your score and address any errors on your credit report before applying.
  2. Gather Documentation
    Lenders will require financial documents such as pay stubs, tax returns, and bank statements to verify your income and assets.
  3. Get Pre-Approved
    A pre-approval gives you a clear idea of your refinancing options and helps speed up the process.
  4. Lock in Your Rate
    Once you’ve chosen a lender, lock in your rate to protect yourself from market fluctuations during the closing process.

How First Western Trust Can Help

Refinancing is a significant financial decision, and it’s important to have an experienced partner by your side. At First Western Trust, we’ll work with you to understand your goals, run the numbers, and guide you through every step of the process. Our team specializes in tailoring solutions to fit your unique needs, ensuring your refinance decision is as seamless and beneficial as possible.

Final Thoughts

Refinancing your mortgage can be a powerful tool for improving your financial health, but it’s not the right choice for everyone. By understanding your goals, calculating the potential savings, and working with a trusted lender, you can make a confident, informed decision.

Ready to explore your refinancing options? Contact us today to schedule a consultation with one of our mortgage experts. Together, we’ll help you determine if refinancing is the best move for your future.

Home Refinancing Strategies in High-Interest Rate Environments

Posted on by First Western Trust Bank

Interest rates remain high for fixed-rate loan mortgages. These market trends could lead to significant increases in monthly payments and debt-to-income ratios for future borrowers. During such times, homeowners looking to refinance a mortgage might benefit from seeking alternative options to traditional fixed-rate mortgages. Through collaboration with a seasoned financial institute, it is possible for homeowners to find lower rates while most of the market deals with a high-interest rate environment. 

However, some transitory refinancing solutions or mortgage products may lead to costly expenses in the long term. Therefore, homeowners must understand each available solution before signing on the dotted line. Buyers can tap into several mortgage refinancing alternatives to minimize the toll of high-interest rates. 

Apply for Adjustable-Rate Mortgages (ARMs)

ARMs are essentially mortgage arrangements that gradually deviate from a fixed interest rate in home loan refinancing. ARMs begin with a fixed interest rate and adjust across a six-month or annual period. While ARMs once had fixed-rate periods of less than three years, these have increased recently to provide improved financing stability.  

For example, a mortgage provider might offer a 7/1 ARM arrangement. Under this agreement, the borrower services a fixed rate for the first seven years and an adjusted final term. In a 3/3 ARM, homeowners service a fixed loan for the first three years and an adjustment for the remaining three years. 

Lending institutions can help guide homeowners through various ARM options based on their needs and priorities. While ARMS offer lower initial payments, it is essential to note that future adjustable interest rates can spike based on market and economic changes. 

Homeowners should check with their lenders regarding exact ARM practices, as some policies offer cutoff amounts that protect against significant interest increases. Also, it is important for borrowers to make the necessary financial plans for servicing higher-adjusted loans that may occur in ARM arrangements. 

Discuss Loan Assumption Options

Buyers who can afford higher cash down payments may consider taking over the remainder of a fixed mortgage term from current homeowners to avoid high-interest market rates. The process, known as loan assumption, allows buyers to take over a property owner’s original term conditions in home loan refinancing. 

However, loan assumptions usually involve substantial paperwork to address various changes that originate from the start of the loan. A trusted lender can help sort through the details, such as accounting for the difference between sales pricing and outstanding loan balances. 

Leverage Home Equity Line of Credit (HELOC) 

A HELOC is an effective method of refinancing home payments during high-interest periods. The revolving loan type allows borrowers to secure a loan against up to 85%–90% of their home equity. According to the Consumer Financial Protection Bureau (CFPB), nearly a million consumers borrowed against home equity in Q2 2022. 

A HELOC offers an adjustable interest rate, where borrowers can tap into the funds via a line of credit for an agreed draw period. HELOC draw periods usually span 5–10 years and depend on financial assessments conducted by the lender, which may include a homeowner’s creditworthiness and the home equity value of a property. 

The HELOC process lets homeowners leverage their equity without replacing current low-interest mortgages with higher-interest cash-out refinances. While HELOCs can help homeowners leverage their equity in high-interest environments, these lines of credit carry some risks. 

It is important to discuss other potential risks and fine print associated with the loan type with a trusted lender before proceeding with the arrangement. For example, since HELOC relies on home equity, borrowers face the danger of foreclosure if they fail to repay the loan based on agreed-upon terms. Also, buyers may feel tempted to borrow additional funds from their HELOC for personal spending, resulting in debts and financial challenges down the road. 

Consider Temporary Interest Rate Buy-Downs

Financial institutions may recommend a temporary buy-down for home loan refinancing in high-interest environments. A temporary buy-down usually involves an additional initial payment in exchange for lower interest rates down the mortgage life cycle. Lenders may extend the discounted interest rate for a few years before reverting to the original values. 

For example, a borrower might request a buy-down at 3.5% for the first two years of a 15-year mortgage loan with a 5% interest. When opting for a buy-down, it is essential to consider factors like the total upfront cost and buy-down period to determine the best long-term outcome. 

Broaden Refinancing Options

Owners may go beyond mortgage refinance options in home loan refinancing by exploring different sales transactions. For example, individuals may consider contract-for-deed arrangements and private mortgages, where sellers and buyers negotiate the interest rates and related terms between each other for a property transaction. These privately settled arrangements may also include late payment provisions and penalty arrangements. 

Engaging in these unconventional financing options requires close attention to the legal agreements to avoid balloon payments and other factors that could result in high-interest rates in the long run. 

Final Thoughts

First Western Trust offers mortgage services for optimized outcomes across different settings, including high interest rate environments. The experienced team applies years of expertise to personalize banking services and diversify investment portfolios for enhanced wealth planning and strategic methods to refinance home loans. Those who partner with us have access to maintaining a loan within our portfolio loan program. Being a part of our program allows us to underwrite cash flow and be more creative than most brokers which can make a significant difference in helping you obtain the right loan to meet your needs.
Reach out to First Western Trust’s mortgage team to discover the most suitable strategies to refinance your home today.