Refinancing can be time-consuming and costly, but it is worth it in the end. You should make sure that you are refinancing the right reasons before you jump in.
Refinances are sometimes done for reasons but ultimately don’t prove to be financially advantageous.
You might, for example, refinance to a longer term with lower monthly payments but end up paying thousands in interest when you extend your loan.
Refinance is a good option for many reasons. These are five reasons why refinancing your mortgage could be beneficial.
Easily Lock in a Lower Rate
Rates are currently at an all-time low. It might be worthwhile to switch your mortgage for one that has a lower rate, especially if it would be significantly lower.
Refinances can be more expensive if your mortgage is older than you are. A rate that is slightly lower if your mortgage is less than a year old can be negotiated.
However, if your mortgage is older than 10 years, the difference could be substantial, as rates were much higher in 10 years’ time than they were in last year.
To Switch from an ARM Mortgage to a Fixed-Rate Mortgage
Perhaps your first mortgage was an adjustable rate mortgage. This keeps your rate constant for the first few decades and then adjusts it regularly. You might be thinking about what the next step should be if your intro rate period has ended.
Your ARM rate may drop during your first annual rate change because rates are so low. This is good news but you might still want to refinance into a fixed rate mortgage.
Rates are at an all-time low, so it is a good idea to maintain a low rate as long as you can. Your rate may not rise next year, or the year after, if you have 25 more years on your ARM. But it will probably increase at some point. Rates won’t stay at this level forever.
However, a fixed-rate mortgage could allow you to lock in a historically low interest rate for the life of your loan , without worrying about an increase in future.
To Shorten the Loan Term
Are you looking to get your mortgage paid off early? It could be possible to refinance your mortgage into a shorter term.
You might have 25 years remaining on your mortgage but want to refinance into 15-year loans.
This will reduce your mortgage by 10 years. Your interest rate will be lower because your new mortgage is likely to have a lower rate and you’ll pay it for a shorter time.
To Tap Into your Home Equity
A cash out refinance might be a good option if your home has appreciated in value since you purchased it. This type of refinance allows you to take out a larger loan than you owe and receive cash for a portion your home’s value.
Before you apply for a cash out refinance, think about how you will use the money. This type of loan is great for paying down high-interest credit cards, making home repairs or making purchases that will otherwise improve your quality life.
Cash-out refinances are not recommended for frivolous purchases. Refinances for unrelated reasons may not be worth it as you will have to pay fees.
There are no restrictions on how the cash can be spent. You decide if a cash-out refinance is worthwhile.
Private Mortgage Insurance Can Be Canceled
If you paid less than 20% down when you purchased the house, you will likely be making monthly payments towards private mortgage coverage. Your lender can cancel your PMI when you have attained 20% equity in your house. However, they may not approve your request.
Once you have 22% equity in the Beverly Hills Mortgage Broker will cancel your PMI.
If you don’t have 20% or 22% equity, refinance your loan to cancel PMI. PMI would not be required if the amount of your new mortgage is less than 80%.
Refinances may not be as good if you cancel PMI. You could end up paying more fees than what you’d save on PMI. Combining PMI cancellation with other benefits such as locking in a lower interest rate could make it a smart move.
Things to Consider Before You Refinance
Refinancing can be beneficial for both the borrower and the recipient. Before you refinance, here are some questions:
Are you in a good financial position?
The interest rate you receive will depend on your credit score and income-to-debt ratio. Higher credit scores and lower DTI ratios usually result in a higher rate.
Rates might be lower now than they were when you first took out your mortgage. If your credit score has declined significantly over the past year, you may not be able to get a better rate. If you have taken on more debt or your income has dropped, you might not be eligible for the best rate.
You can improve your credit score through timely payments, debt repayments, and letting your credit age. You can lower your DTI ratio through asking for a raise, side hustle work, or paying down debts.
While refinancing might not be the best move for you right now, it can be beneficial later if your finances are more stable.