Refinancing your mortgage-discover the benefits
Refinancing your mortgage can be a strategic move to improve your financial health. There are various reasons to consider refinancing. You may want to consolidate debt and free up monthly cash flow or access your equity for home upgrades or some other important project. Over the past few years, the historic rise in home values has made more Americans than ever ‘equity rich,’ meaning they have a significant amount of value in their homes. What does this all mean to the average homeowner? It means that if you have no plans to sell your home, you could be sitting on a source of funds that you can easily tap into!
Why would homeowners choose to refinance?
Cashing out home equity
Refinancing allows you to unlock the equity accumulated in your home. By refinancing an amount greater than your current mortgage, you can receive the difference as a cash payment. This cash can be used for home improvements, paying off high-interest debts, or other significant expenses. However, it’s crucial to remember that cashing out equity increases your debt and could lead to a higher interest rate. It’s essential to work with a loan officer to assess the financial implications of refinancing. Often, borrowers find that while the mortgage rate may increase, the consolidation of household debt significantly frees up monthly household cash flow.
Equity is the difference between what you owe on your mortgage and your home’s market value.
Changing loan terms
Another common reason to refinance is to adjust your loan terms. This could involve extending the loan term to reduce monthly payments or shortening it to pay off the mortgage faster. However, it’s important to note that switching to a shorter-term loan may increase your monthly payments.
Switching loan types
Some homeowners refinance to change their loan type, for instance, moving from an ARM to a fixed-rate mortgage. ARM interest rates and payments can fluctuate with market conditions, whereas a fixed-rate mortgage offers stability with a consistent interest rate and monthly payment.
Another scenario involves switching from a government loan, such as FHA or VA, to a conventional mortgage and removing mortgage insurance.
Removing a co-signer
If you initially needed a co-signer to qualify for a mortgage, refinancing can allow you to remove them after improving your financial position. This not only frees the co-signer from their financial obligation but might also help you secure a lower interest rate, particularly if your credit score has improved. Homeowners may also wish to remove a co-signer in cases like divorce, where one spouse takes sole ownership and full responsibility for the mortgage.
Eliminating Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP)
For those who put down less than 20% on a home, carrying private mortgage insurance (PMI) is often required. While conventional mortgages allow you to remove PMI once you reach a certain equity threshold, some loans, like FHA, require a mortgage insurance premium (MIP) for the loan’s life. Refinancing to a conventional mortgage can eliminate MIP costs.
Securing a better mortgage rate
One of the primary reasons homeowners refinance is to secure a lower mortgage interest rate. In this case, you would want to pay attention to factors that impact mortgage interest rates. Staying in touch with your loan officer so they can monitor your account for saving opportunities will ensure you are ready when the market turns. When the time is right, refinancing to a lower rate can lead to substantial savings over the life of the loan and lower your monthly payments.
How do I know if refinancing is right for me?
As you can see, refinancing offers many potential benefits, from securing better rates to changing loan terms and tapping into your home’s equity. If you are “equity rich” and have revolving debt you want to reduce or other personal goals to achieve, you may want to consider refinancing. However, refinancing may not be suitable for everyone, so carefully consider your circumstances and financial goals before deciding. It’s essential to consult a highly trained mortgage loan officer who can help you determine whether it’s the right move for you.
