There has been an exciting boom in U.S. house borrowings, a positive development that is expected to continue for some time. It is an opportunity for homeowners who wish to capitalize on what everybody has been eagerly waiting for: the Federal Reserve lowering the interest rates. In March 2020, as reported by CNBC, the Feb had already cut the rates by 50 basis points.
According to the Mortgage Bankers Association (MBA), of the total mortgage activities posted by the end of June 2020, at least 62 percent were for home refinancing, a clear sign for the market segment. For those who are familiar with the in’s and out’s of home loan servicing, this is a chance that nobody should miss. The volume of mortgage loan applications also increased by 8 percent. In a dramatic show of impact, the MBA also reported that these applications posted a record surge of 479% in terms of year-over-year data.
Some who are new to the entire system of processing home-related borrowings might need a few insights. There are several essential points to learn and remember when refinancing is being considered. It is an excellent option to take if you want to:
1. Reduce your monthly payment of the mortgage
This is the most common reason why borrowers apply for a new financing arrangement. Given the recent changes in the U.S. economy and job market, people are looking for better deals that would allow them to maintain their liquidity while remaining on track with loan payments.
Should an opportunity arise when the borrower can make lower monthly payments, the immediate effect might be the needed stability in his or her monthly budget. With a lesser amount of monthly payments to make, the borrower would have more cash left over for other essentials. When budgets are untied from loan obligations, more money is left at the disposal of the borrower.
2. Enjoy a lower interest rate
In a scenario when the Fed intervenes and puts a lower cap on interest rates, it is advantageous for the borrower. In some cases, the loan facility itself would make interest rates more attractive to existing or potential loan applicants. Industry professionals recommend seeking a new loan deal when there is a one to two percent decrease in the interest rate.
3. Pay your loan faster
A scenario might present itself when the borrower could pay off the loan faster. This would make a new loan arrangement ideal. This applies to borrowers who have more liquidity, of course. The primary consideration is the potential savings they can gain by paying off the loan earlier when compared to the amount to be paid in interest over a longer loan payment scheme. Some borrowers prefer to take on a slightly higher interest rate to shorten the period of their loan. This means that they prefer to regain liquidity quicker and strike off liabilities in their balance sheet.
4. Live in the house for a long time
Experts say that it is always an excellent strategy to adjust a loan structure if you plan to live in the house for an extended time. If you expect to live in the house for about 4 to 7 years, that period will be enough for the loan to be serviced according to schedule, without the burden of a higher interest rate that is usually associated with short-term loan agreements.
Those in the know about home loan restructuring evaluate three main factors: equity, credit score, and current income.
Equity plays a central role, especially since it can be leveraged as a tool to get another loan, which can then be used to support other projects such as a home renovation or to fund other targets related to acquiring assets.
Credit scores, on the other hand, are essential simply because these are part of the requirements in processing an application. For a typical mortgage, a score of 620 or higher is ideal. Since the conditions are not uniform and change from one lender to another, doing adequate research on this is advisable.
For income, it is a crucial detail to know that many lenders operate within the range of 36 to 43% debt-to-income ratio. Again, it is important to check current industry practice to get accurate, up-to-date information.
To the layman, these technical terms related to home loans seem complicated. With enough time and study, a borrower can get a better handle on the dollars and cents aspect, legal clauses, and industry practices related to home financing.
In the end, knowing more about the process can lead to actual cash savings, a faster way to untick a line from one’s list of liabilities, and a means to improve one’s financial well-being. And yes, homeownership with loans paid in full is the most important benefit of all.