When Should You Refinance a Home? 5 Things to Consider
Refinancing is the approach of replacing your current loan with a new one. Mortgage refinancing allows you to take a new type of loan, take a new interest rate, change your loan term or consider new mortgage lenders.
Types of Refinancing
There are many options to choose from when refinancing. Refinancing and home mortgage applications are similar in that you will submit your documentation to the lender so they can underwrite your loan. In most cases, an appraisal is needed before refinancing. After the appraisal and underwriting process is done, you will close and sign your new loan. The following are types of refinancing.
Rates and Terms Refinancing
Rates and terms refinancing help you change your loan set up without interfering with your principal balance. You can own your home quickly by increasing your monthly payments and saving on interest, or taking a longer-term and lowering your monthly costs. When the market rate is lower than when you got your loan, you can go for a lower interest rate.
Cash-Out Refinance grants you access to your home's equity in return for taking a higher principal. For example, when your principal balance is $150,000, and you're making repairs worth $30,000. After closing your loan, your lender will give you $30,000 in cash since you accepted a loan valued at $150,000. Cash out refi is not instant since it takes time before you receive your funds.
When Should You Refinance Your Home?
There are many options to consider if refinancing will be worth your while. Loan period, mortgage rate trends, and home value are the factors that drive you to mortgage refinance. Below are points that you should consider when refinancing your home.
Five Things to Consider When Refinancing your Loan
Refinancing is always done such that it is worth it in the long run. Some of them include:
Your rate might be low right now, but rates are constantly increasing. Switching from an adjustable-rate mortgage to a fixed-rate mortgage can be your first move. ARM maintains your rate for the first years then changes it periodically, meaning future interest rate hikes or drops. When rates are low, and you want to keep it that way, consider refinancing to a fixed-rate mortgage. You will lock on the low rate for the rest of your loan life when the rate is fixed instead of getting stuck to high-interest debt.
Shorten your loan term
If you want to payoff your mortgage early, refinancing to a short-term mortgage can help you out. For instance, when you have 20 years remaining on your mortgage, but you want to refinance to a ten-year loan. Refinancing will shave ten years off your mortgage. In addition, shortening your loan period will help you pay less interest since the rate will be lower than your existing mortgage rate, and you will pay interest for a short time before you're done.
Getting rid of private insurance
If you had less than 20% for the down payment when buying your house, you are likely to be paying monthly fees to private mortgage insurance. You can request your lender to cancel private mortgage insurance when you reach 20% of your home equity. Mortgage interest rates are higher with private insurance. Even though they are not guaranteed to approve your request, the lender should cancel the private mortgage insurance once you hit 22% of your home equity.
Tap into your home equity
Your home can gain value from the last time you bought it. When this happens, you might do a cash-out refinancing. Cash-out refinancing is when you take a larger home equity loan than the one you still owe and receive a portion of the value gained by your home. You can use this loan to payoff your debts and make your home repairs. That way, your home value will keep increasing, and your life's quality will improve.
Your credit rating
Debt to income ratio and credit score both have a significant role in the interest rate you get. A lower debt-to-income ratio and a good credit score will get you a lower monthly payment. Boosting your credit score can be achieved by paying down debts, making payments on time, and letting your credit age. Debt to income ratio will be lowered by paying off your debt. Refinancing is a great idea when bulking up your finances.
Refinancing is a smart financial move because it saves you money on a monthly mortgage payment and total interest paid during your loan term. However, you should carefully think about the time you want to refinance your mortgage and a financial advisor can help save money. The money you save should be weighed against the cost of refinancing. If the outcome is to your advantage, take it.
Do you need professional help with your refinancing situation? Connect with one of our mortgage experts today!
* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.