Are you wondering, “Why should I refinance my house? It’s a fair question since refinancing can cost anywhere between 3% and 6% of your loan’s principal. It can take years to recoup that cost with the savings you generate from a shorter term or a lower interest rate. Plus, it requires a title search, an appraisal, and application fees.
With that said, there are many benefits of refinancing your home loan, especially if you plan on staying put for more than a few years. It can help you aim for a short-term mortgage and a lower interest rate. You can weigh the benefits against the potential risks to determine if it’s the right financial decision for you or not.
Why Should I Refinance My House Now
Here are some reasons why you might want to refinance your home loan:
Acquiring a Lower Interest Rate
If the overall market interest rates drop, refinancing your home can help you secure a lower interest rate, which will lower your monthly payment and total interest rate. You can also pay interest on a smaller principal amount, possibly over a more extensive payment plan to lower your monthly payments.
A higher credit score will help you acquire a lower interest rate on your mortgage. You will need a credit score of 760 or higher to get the finest rates. Bringing cash to the closing might also help you get a lower interest rate or enable you to avoid private mortgage insurance (PMI.)
Typically, the rule of thumb dictates that refinancing is ideal if you can effectively reduce your interest rate by about 2%. However, many lenders will also tell you that 1% savings are enough to refinance your home. You can use a reliable mortgage calculator to budget your costs and ascertain if it’s the right decision for you or not.
Shortening the Loan Term
You can also refinance your home loan to shorten its overall term. It’s a great idea if you have financial security and your existing loan term is too long. For instance, you might benefit from refinancing a 30-year plan to a 15-year mortgage loan plan. Even though your monthly payments will increase, the interest rate on a 15-year plan will be significantly lower. Plus, you will shave off years from your mortgage, paying less interest over time as well.
Accessing Your Home’s Equity
You can also refinance to take cash out and refinance closing costs. These refinancing terms have higher rates, but they allow you to borrow money. It’s a good idea to access your home equity via a cash-out refinance when you have at least 20% equity remaining after the transaction. However, if your only goal is to generate cash without changing your loan term or lowering your interest rate, you might benefit from a line of credit or home equity loan than cash-out refinancing.
Switching Loan Types
Some borrowers refinance their home loans to change the type of loan they have to pay off. For instance, if you have an adjustable-rate mortgage and you have to pay a higher interest rate, you can refinance the loan to get a fixed-rate one that offers a lower fixed rate. It will eliminate the risk of future hikes in the interest rate.
On the other hand, if you have plans to sell your home in a few years and you can afford to pay off a higher interest rate at any point if you cannot move as planned, you can certainly opt for an adjustable-rate mortgage. This way, you will benefit from a lower monthly payment when the interest rates are low. However, this will be an unwise strategy if you have no plans of reselling for a long time because you might have to face a hike in interest rates.
Getting Rid of PMI or an FHA Loan
FHA loans have mortgage insurance premiums or MIPs that cost borrowers $800 to $1,050 every year for every $100,000 they have borrowed. Unless you pay more than 10% for the total mortgage amount in a down payment, you will have to pay these premiums for the life of the loan. With that said, you can get rid of them by getting a new mortgage that the FHA does not back through refinancing.
Moreover, if you have a conventional mortgage on which you pay private mortgage insurance, you can refinance the mortgage to avoid the insurance. Even though eliminating the PMI is not reason alone to refinance, you can certainly consider it if your aim includes getting a lower interest rate. Alternatively, you can request PMI cancellation once you have enough equity, typically 20% of the loan.
A Word to Remember
You need to remember that refinancing costs will take you years to recoup. Moreover, if you want to refinance due to a financial emergency, you need to research all possible options before opting for a cash-out refinance, as it might lead to a higher interest rate on the new mortgage.
Additionally, if you have generated a high-interest debt on your cards, cars, or other purchases, you might end up doing it again after the mortgage refinancing gives you the available credit. It will create an instant loss from wasted fees, additional years of increased interest payments, lost house equity, and compounded high-interest debt, perpetuating the debt cycle.
The Bottom Line
All in all, refinancing is a great financial move for someone benefiting from a reduced mortgage payment and a shorter loan term. When used carefully, you can also bring your debt under control through refinancing and build your equity quickly.
However, before refinancing, assess your financial situation and ask yourself if you plan to live in the house for a long while and how much money you stand to save. You must also remember the total cost and weigh it against the benefits of refinancing your home loan to assess whether it will be worth it or not. If you want to learn more about refinancing or find out if you qualify, contact Integrity Mortgage today.