Why Should I Refinance My Mortgage?
There are many reasons you might want to consider refinancing your home. However, when we look at these types of financing transactions, they can really all be narrowed down to four main reasons:
1. To lower your rate,
2. To change your term (typically to lower your payments),
3. To change the loan type or
4. To cash out equity for other needs.
Lowering Your Rate
Anytime you can lower your interest rate it is worth looking into refinancing your mortgage loan, especially if your term is the same as your current term (For example: going from one 15-year loan to another 15-year loan). The reasoning behind this is that since everything else is remaining the same, if your rate goes down, your monthly required payment (not including your taxes or homeowners insurance) will go down.
In most cases, this would be a good deal that you should take advantage of, but before you agree to sign on your new loan, there are a number of things you should keep in mind.
Always be certain to review at the annual percentage rate (APR). This is generally printed to the right of your base interest rate and includes your base rate plus any closing costs and any other fees added in. The larger the difference between your base rate and APR (Annual Percentage Rate), the higher your charges will be to close this loan.
Something else to keep in mind is the cost of any mortgage insurance costs that may be applied to your loan. If they do than don’t forget to factor them in to your monthly costs. There also are situations where you can refinance to get rid of mortgage insurance costs that are mentioned below.
Changing Your Loan Term
Another reason to explore refinancing your current home mortgage is to change your term. You can either with to increase your term to a 30-year term or decrease your term to a 15-year term.
Whats the difference?
Refinancing a longer loan to a shorter mortgage loan will most certainly afford you a lower interest rate. This is due to the fact that the lender does not has to speculate on where rates might go for the longer term, less risk for the lender, so lower rates.
You also save on the total interest payments over the life of the loan.
On the monthly payments you do make, more of the money goes directly towards paying off the principal amount. In this case equity builds at a faster rate. One of the downsides of this type of loan is that your monthly payments may be higher because you are paying off the loan faster. This is typically the case even though your situation may differ.
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What cannot be disputed is that if you are paying over a shorter term you will be paying less total interest.
If you refinance from a shorter loan term to a longer one, you’ll be receiving a slightly higher interest rate because the lender has to take into account inflation over a longer period of time. A longer term also typically comes with a lower monthly payment. This may fit your current cash flow better.
Going after a longer term loan isn’t for everyone for the obvious reasons. You are taking longer to pay off your loan and you are paying more interest over the term of the loan Depending on your situation it can mean that you have more money for other investments that provide a better return on the capital that in your home
You can check the calculator below to see how your payments change with different loan terms.
Changing Your Type Of Loan
FHA mortgage loans have their benefits, they allow you to get into a home with as little as 3.5% down and FICO scores as low as 580.
The downside of FHA loans is upfront and monthly mortgage insurance premiums. These stick around for the life of the loan if you make the minimum down payment. If your credit is in good shape (620 or higher FICO) and you land with 20% or more equity, you can lose these mortgage insurance payments by refinancing into a conventional loan.
If you don’t have 20% equity, the insurance comes off once you reach that point if you’re current on your loan.
Mortgage insurance is something that gets people hear about and don’t look kindly at because it is a recurring fee. However, it does enable the lender to give you a loan with a much lower down payment and protects the lender for part of the funds in the event that you default.
Cashing Out Equity
One’s home is typically the most valuable asset that they own. There are situations that arise though your life and in owning a home that may require you to need additional cash. Some of these could be unexpected medical bills, needing a new roof or kitchen or other needs.
Over the course of your loan repayments your equity has increase each and every month that you made a monthly payment. The principal portion of these payments along with the increase in value of your home over time is your homes equity. You can use this equity to cash out and put it towards other needs.
Other common cash-out refinance uses are for debt consolidation of high interest rate credit cards. By procuring a cash out of refinancing of your home to pay off these balances, you can pay off the loan and have a loan at todays rates, lowering your interest payment from a potential 15-20% to todays rates in the 4%. This will lower your monthly payment and help you pay off your obligation faster.
Another reason could be college tuition or needs. The important thing to consider with a cash-out refinance is whether you have enough equity to accomplish what you want to get done by taking cash out. This is especially important because mortgage investors do require that you leave a minimum amount of equity in the home.
With a conventional loan, you need to leave at least 20% equity in your home on a cash-out refinance. With an FHA loan, this number is 15%. VA loans allow you to cash out all of the equity in the home conforming loans, but only eligible active-duty service members, veterans and their surviving spouses with 680 meeting FICO scores qualify to borrow the full appraised value.