Homeowners
How Can I Benefit from an Interest Rate Drop?
March 31, 2020
When you hear the words "Mortgage rates have dropped" and "Lowest refinance rates in years," many thoughts may race across your mind like "How does that affect me?", "what can I do to learn more?" and "Where do I start?" As you're trying to sort it all out, here are some important facts to help you gain a better understanding of mortgage rates dropping and how they may affect you.
Understanding Interest Rates and APR
Before we reveal the answers about how you can benefit from lower interest rates, it's important to understand interest rates and the Annual Percentage Rate (APR).
Let's start with your annual interest rate. This simply refers to the cost of borrowing money on the principal loan amount – in other words, the amount of interest you'll pay. It is ultimately determined by your creditworthiness. Along with your principal loan balance, your interest rate is used to calculate your estimated monthly payment.
Benefits of an Interest Rate Drop
Key Takeaways:
- Lower your monthly payment.
- Pay loan off faster.
- Take money out of your home's equity.
A lower interest rate also means less money spent over the life of the loan. Sometimes it can even mean you can afford more house.
In the case of a refinance (no cash out), the borrower will get smaller monthly payments—and more money in their pocket each month— but typically a longer term for repayment. However, the borrower may be able to repay their loan earlier if they take a shorter-term loan such as a 15-year fixed rate vs. a 30-year-fixed rate. (The monthly payment is typically higher in this situation.)
To pay their loan off faster, the borrower could take the difference between what they used to pay vs. what they are paying now and apply it toward the principal loan amount (in addition to their payment). This could mean more money in the borrower's pocket once the loan is paid off.
Lower interest rates also make taking cash out from a home's equity an attractive option for home improvements such as a new roof, pool or patio deck. There's also the opportunity to put the money in your savings account for added security.
Educating Yourself about Lower Interest Rates
Understanding how lower interest rates impact you has a lot to do with your credit score. This helps lenders determine your creditworthiness. Other important considerations include the concepts of equity as an asset to take cash out of your home and the Loan to Value (LTV) of your loan balance versus what your home is worth.
Next, your documentation for your lender should be in order. Generally, when purchasing a home, you'll need tax returns, proof of income, bank/asset statements, credit history, and gift letters if you are receiving gift funds for your home loan. Similarly, it is wise to gather your documents for a refinance…starting with your existing mortgage statement, which indicates your loan balance, current interest rate, etc.
Taking Advantage of Today's Low Interest Rates
As a homeowner, it's always wise to do your due diligence about your financial situation and determine whether refinancing your mortgage or purchasing a new home would add value to your current budget and future needs. At the very least, it's worth thinking about.
Need more information or want to take the first step in the loan process? Contact New American Funding today. One of our experienced Loan Officers will be happy to answer your questions and help you find the right loan for you.
