After losing an average of 35% in home equity since the real estate crash, many Americans have seen their home equity increase significantly as the market improves. Based on a Federal Reserve Board report, equity has risen by $1.7 trillion since 2011.
In fact, a recent Federal Reserve board study shows that homeowners experience about a half $1 trillion increase in home equity during the final quarter of 2012. The current total of $8.2 trillion in equity represents the highest amount since the beginning of the housing crisis.
More Homeowners Refinancing
Homeowners have been paying down their mortgage balances and millions of homeowners have taking advantage of extremely low mortgage interest rate been to refinance their mortgages into smaller loans. Although many people continue to face the issue of negative equity in their homes, also known as underwater mortgages, there are also many individuals who have growing home equity.
Rising equity and low mortgage interest rates put more homeowners into the position of refinancing their mortgages for the first, second or third time or qualify for cash out refinance.
In addition, as the market improves, many homeowners who have wanted to sell, especially those close to retirement, will now list their homes listed their homes on the market and cash out their equity to help fund their retirement lifestyles.
For those looking to complete a mortgage refinance, here are some strategies that will help you get the best deal possible for your new loan:
Refinance With the Current Lender
Many homeowners find that if they refinance their home loans through the same mortgage lender, they can negotiate extra discounts because many banks want to keep your business on the books. Some of the possible savings could include the following items:
- Waving home appraisal fees
- Eliminate or reduce application fees
- Obtaining a better interest rate
Keep in mind, your current lender already have much of the basic documentation from your original mortgage or last mortgage refinance. You will only have to update it. This can make the whole refinancing process easier and quicker.
This strategy does not keep you from comparing rates between various lenders. In fact, you should make the comparison and challenge your existing lender to make you a better offer of the terms of the loan.
Credit towards Refinancing Costs
Looking to save money on out-of-pocket costs? Here's a strategy that many owners do not think about because they are focused on getting the lowest mortgage interest rate possible. Find out from your mortgage lender how much closing cost will be if you refinance at a higher rate than the one you would normally qualify to receive.
In effect, the lender will give you a credit towards your closing costs if you refinance at the higher rate. For example, you qualify for the best rate at 3.79% but instead refinance the home loan at an interest rate of 4.29%. The lender gives you a credit of the difference toward your out-of-pocket costs.
30-Year Fixed or Adjustable Rate Mortgage
Many homeowners prefer a 30-year fixed loan because it provides security of a set monthly mortgage payments for 30 years. The only element that changes involve the amount of the payment applied to the principal and interest from month-to-month.
After the housing bubble burst, adjustable rate mortgages (ARM) received an unfair rap because many of the people who subsequently lost their homes and foreclosure had ARMs.
Numerous mortgage lenders made aggressive use of ARMS leading up to the housing crash--qualifying people at lower interest rates and getting them into more home than they could realistically afford.
The problem was that many borrowers did not have the credit and income that would have allowed them to qualify for ARMs under more prudent underwriting standards. When the economy soured and the housing market turned down, they did not have the necessary resources to withstand the eventual rise in interest rates or the huge hike in their monthly mortgage payments.
Borrowers who choose to refinance into this mortgage product need to have a strong feel about the future direction of inflation and interest rates. If you have the opinion that inflation will remain in check and you intend to live in your home for a few years, refinancing to an ARM can save you money.
Most lenders offer adjustable rate mortgages. Adjustable rate mortgages usually come in durations of one, three, five, seven, and ten years.
Another refinancing strategy that you may want to consider is to extend or the length of your mortgage or the amortization. If you would like to lower your monthly mortgage payment even more you may consider taking on a 40 year mortgage instead of the traditional 30-year fixed rate loan.
Conversely, if you plan to retire in the next several years, you may want to refinance into a loan with a shorter-term such as 10, 15 or 20 years. Many homeowners have chosen this refinancing option to correlate paying off their mortgage with their retirement.
Get a Lower Rate After Lock
You should always lock in your interest rate once you submit your refinance application. Often, between the submission of your application for a home loan refinance and receiving final approval, mortgage rates will fall even further. Do not hesitate to ask your bank to lower your interest rate.