Is Now the Right Time to Refinance Your First and Second Mortgages?
There are several reasons to consider a refinance, there can be more to it than just lowering the rate on a loan. If you’re looking at your mortgage and thinking of refinancing, let’s talk about your options based upon your personal financial situation and not some “model” based upon when it’s a good time to refinance and when it’s not.
Homeowners can refinance for a variety of reasons. Yes, if rates are currently lower than what you have now, the topic of refinancing is soon to come up. Over the past few months, rates have reached some historic territory so even if you bought and financed your home just a year or two ago you might very well be surprised where rates are today.
Benefits: When to Refinance
Along with lower rates, a good reason to refinance might be to secure a shorter-term loan. A shorter loan term will require much less interest over the life of the loan compared to a longer-term loan. A 30-year loan refinanced into a 15-year loan will increase the monthly payment, but the amount of interest saved may surprise you. That’s because the payoff period for the loan is essentially squeezed in half, so it makes sense that less interest will be paid. However, sometimes the monthly payment for a shorter-term loan is too high. Sometimes so high the borrowers can’t qualify for a shorter-term loan. Given the state of rates today, the “payment shock” between an existing 30 or even a 20 or 25-year term will have been lessened.
Refinancing a “balloon” mortgage is another reason to take action. “Balloon” mortgages are those that offer a slightly lower rate for a specific period of time but at the end of that period, the entire balance becomes due. Homeowners with a balloon note know in advance when their note comes due and can begin the process of refinancing into a permanent mortgage with no balloon.
Combining First and Second Mortgages
Now is an excellent time to refinance a first and a second mortgage into one new one. Second lien mortgages are considered as subordinate to an existing first. That means when the loan is paid off, the first mortgage is satisfied before any leftover funds can be applied to the second mortgage. Due to this subordination, lenders will price second mortgages slightly higher than a first. What we typically end up with then is a second lien with a higher rate.
Shorter loan terms for second liens are also a common reason. Not only do we have a higher rate, but the loan term is also shorter, raising the monthly payments even more. Not by a lot, but certainly higher than the first lien. A common first-and-second lien transaction is sometimes referred to as an 80-10-10 or 80-15-5. The “80” represents 80% of the sales price and the “10” or “15” represents 10 or 15% of the sales price with the third digit being the amount of the down payment based upon a percentage of the sales price.
Refinancing both the first and second mortgage can also reduce the monthly payment on the loan compared to a first-and-second structure where the total of the two loans is greater than what a new payment would be by combining the first and second together into one larger loan. This is why anyone who has a first and second lien mortgage might benefit by refinancing the two into one.
If this is your situation then we should have a quick chat about lowering your overall monthly payments with a brand new rate and a brand new loan. There are more options available than you may be aware of.