When to Refinance your Mortgage
By: Crystal Catuara Garcia| Mortgage Loan Originator, Barrett Financial Group|NMLS 1690462
Refinancing your mortgage can save you a substantial amount of money over the life of the loan. When you're refinancing make sure to take into account the upfront fees associated with the refinance. Those upfront fees can also be rolled into the loan if that is something you chose to do... Mortgage rates are still historically low and you may have many of loan options, but take some time to figure out whether refinancing is your best move right now. How long you plan to stay in your home, your financial goals and your current credit profile all play a role in your decision about whether or not to refinance.
Here are the top 4 reasons you may choose to refinance your home.
Lower Your Monthly Payment
Refinancing to a lower interest rate in return lowering your monthly mortgage payment will allow for extra income that can be put toward other things, like debts, expenses, investments, or even vacations. If you're refinancing to secure a lower interest rate, it is advised to refinance only if you can reduce your rate by at least 1%. Reducing your high interest rate not only helps you save money on your monthly payment, but it also increases the rate you build equity in your home.
Change from an Adjustable-rate to a Fixed-rate Mortgage
When used sensibly, an ARM can be an effective mortgage loan option. Just be sure you know the date of when the interest rate is scheduled to fluctuate. ARM rate changes tend to move upward, resulting in increased monthly payments for you. A good way to avoid this is to refinance out of the loan as you’re nearing the end of the initial fixed-rate period.
Take Cash Out
When you have equity in your home, cash out refinancing can enable you to turn that equity/value into cash. You may want to do a cash out refinance if:
- You want to make a large purchase but do not have access to funding, or other funding is more expensive than the rate you can get on a refinancing
- You can take extra equity from your home to pay off any outstanding debt and save money.
Some examples of what you can do with the equity you take out include:
- Making some home improvements
- Purchasing an investment property
- Paying for your child’s education
- Paying off credit cards, medical bills or other higher interest debt
Getting Rid of PMI
Private Mortgage Insurance, or PMI is required by most mortgage lenders when the borrower is unable to put 20% down. PMI protects the lenders in the event that you, the home owner will default on the loan. Most banks/lenders will automatically remove PMI when the loan balance has reached 78-80% of the value of the original purchase price. If you didn't want to wait until the loan balance reaches that 78% you could get started on removing PMI through refinance by proving to your bank/lender that your home has appreciated enough to bring your LTV (Loan to Value) ratio down to 80%. You will have to get an appraisal by a licensed professional to prove your homes appreciation.