Should You Refinance Now?
With the ongoing chaos of the housing market, it’s hard to discern whether to keep your current mortgage or refinance to a new one. Rates were at a historical low, but now they are going back up. If you’ve been in your home for a few years, it makes sense that you might want to seize the moment before rates climb higher.
There are also moments when refinancing doesn’t make sense. Despite the reasons for and against the argument to refinance your home, the key to getting the best deal is knowing when a refinance makes sense and when it doesn’t.
Lower Your Interest Rate
One reason many homeowners refinance is to lower their interest rates. Reducing your interest rate can save you thousands, and sometimes tens of thousands, of dollars. This option might be great for some but evaluate your current mortgage before signing.
The concern isn’t the why; it’s the “when” of refinancing. When you begin mortgage payments, most of your payment is going toward your interest. It isn’t until later that you’re making a dent in the principal. When you consider refinancing, you might be starting over if you opt for the same or similar term as your original mortgage. This option might give you a lower interest rate, but you’ll pay more interest over the term of your loan.
Lower Your Monthly Mortgage Payment
Refinancing also gives you a way to lower your monthly payment. If you’re struggling to make your current mortgage payment or at risk of default, this might be a good reason to consider a refinance. Remember, though, when you refinance for a lower payment, you’re often refinancing to a longer term than what you have left in your current mortgage. Since most of your initial payments go toward interest, you’ll pay more interest over the longer term. Still, it can help ease the affordability of your mortgage payment and lessen the likelihood of default.
Shorten Your Loan Term
If your payment is already affordable and you want to pay your home off sooner, refinancing to a shorter loan term makes sense. A shorter term might also help you fetch a lower APR, but that’s not always true. If you maintain a good credit score and clean credit history, you’ll improve your chances.
Nonetheless, you’ll likely pay a higher monthly mortgage payment with a shorter term, so before refinancing, make sure you have plenty of wiggle room in your budget and work with your lender for the best possible outcome.
Eliminate Mortgage Insurance Premiums
PMI usually accompanies conventional loans when you have a down payment of less than 20%. Like PMI, mortgage premium insurance often follows a government-secured mortgage like an FHA loan. Mortgage insurance can add an extra 0.5% to 3% to your mortgage per year, depending on whether you have private mortgage insurance with a conventional loan or mortgage premium insurance with an FHA loan.
Both mortgage insurance options protect the lender in case of default, but there is a difference in when or if you can eliminate the extra payment.
If you carry a conventional mortgage with PMI, you can request your lender remove the private mortgage insurance once you’ve accumulated at least 20% equity; otherwise, it’ll usually drop off once you reach a loan-to-value of 78%. However, it’s different for mortgage premium insurance with an FHA loan.
Depending on your situation, MPI might drop off after 11 years, or it might remain for the life of the FHA loan. In this case, sometimes refinancing to a different type of loan will eliminate it. However, you’ll generally need to be in your home for a few years to accrue enough equity for the refinance. You’ll also need to have a good credit score and clean credit history for conventional lending consideration since traditional home loan qualifications are often stricter.
Get Cash for Your Equity
Sometimes life happens. You have unexpected home repairs. You’re making home improvements or eliminating debt like student loans. If you have enough equity, a cash-out refinance can give you the funds you need when you need them most. However, carefully evaluate your situation before agreeing to this refinance since it will leave you with a larger mortgage. It might also result in a larger monthly mortgage payment and a higher interest rate.
A mortgage refinance is an excellent tool for some, but it’s not the answer for everyone. Weigh the pros and cons of the refinance before signing on the dotted line. Try our online mortgage refinance calculator to simulate how a refinance might look for your situation. Visit our website to learn more about whether a mortgage refinance might be right for you.
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