If you’re considering a refinance you’re probably doing your research beforehand, hence why you may have stumbled across this post. Refinancing a home loan can be a great idea for many reasons, pulling money out for remodels, lowering payments, or decreasing terms. Refinancing too often is probably not the best idea because it’s just not worth it and you may have a pre-payment penalty. However, if it’s been at least 3-5 years since you obtained the original mortgage or a refinance, you may want to look into the possibility of a refinance and if it makes sense.
Let’s think about the reasons first.
Remodel, renovations, consolidations, etc..
Many people pull equity out of their home for major home renovations. These renovations can be costly and many people just don’t have thousands of dollars to throw at a remodel so this is where a refinance makes sense. If you have enough equity in the home, meaning you owe less on the home than it’s currently worth, you might consider pulling some or all of that equity out in order to complete the renovations. Pulling it all out and maxing out your home’s value is a little risky, though. If the value of the home drops you may be underwater in your mortgage. This is typically fine if you plan on staying a while or at least until the value rises again. But if you plan on selling, you may not want to max out your equity as you will be upside down on the loan.
Perhaps you have several debts you plan on consolidating. Student loans, credit cards, etc… can all be consolidated into a 2nd mortgage or paid off with the equity in the home. While this may seem like a great idea, don’t forget that you are now rolling that unsecured debt into a longer pay off. For instance, if you have $10,000 in credit card debt with a 10% interest rate, you could have that paid off in a couple years if you really tackle it aggressively versus rolling that into a 30-year mortgage with a 3% interest rate. You will probably pay more in interest just because you’ll be paying on it for much longer.
Read More: When Do You Know It’s Time to Refinance?
A refinance is a great way to lower your monthly mortgage payment, however, this only works if you can get a lower interest rate than you have now. A good rule of thumb is to refinance if you can lower your interest rate by at least 1 percent. If you currently have over a 5% interest rate and you can drop that to 4% or lower, a refinance could save a significant amount each month.
When you first bought your home you probably opted for a 30-year mortgage. Spreading out a large loan into 30 years reduces the monthly cost but also increases the amount of interest you pay. Many first time home buyers go with a 30-year loan because it’s the easiest to maintain but after a while, you may find that you can afford more each month. You can either apply more toward the principle each month or refinance to a lower term. You can get better rates on a 10-year or 15-year mortgage than for a 30-year and save a tremendous amount of money in interest. Plus, your home will be paid off in half the time and you’ll be building equity faster in case you need to pull out money at a later time.
PMI or private mortgage insurance is required on most loans that allowed for less than 10% down payments. There are some loans that can avoid this insurance with as little as 3% down but for the purpose of this refinance, we’ll talk about the PMI. If you purchased your home with less than 10% down, mortgage insurance may have been added. This is a separate fee paid each month with your mortgage in order to cover the lender should you default on the loan and the property needs to be sold. Once the property reaches an 80/20 loan to value ratio, meaning you now owe less than 80% of the value of the home, you can eliminate this mortgage insurance. This could save you several hundred dollars a year. Check with the specifics on your loan, however, because you may not have to refinance in order to remove this.
Related: A No Cost Refinance?
Switch from an ARM
ARM or Adjustable Rate Mortgage makes sense in specific situations. If the rates are high but may drop, an ARM could be the temporary solution to a lower payment. But, if your mortgage requires a balloon payment at the end of a specific time frame, you may want to refinance to a fixed rate mortgage in order to avoid that payment. ARMs are fine for the right situation so be cautious when applying. Talk to you lender about the best option and when may be the best time to refinance.
Think you’re ready to refinance? Give me a call today! Let’s discuss your situation and find a solution that works for you and your current budget.
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