Typically, when mortgage interest rates drop, there is a lot of buzz in the media and at the water cooler with people asking, “Should I refinance my home now?” That’s a smart question! Let’s make this easy and break it down into 7 ways a refinance could work to your advantage.
And just so we’re clear, here’s what a refinance is: When you’re refinancing your mortgage, you’re taking your existing mortgage, paying it off and then replacing it with a new home loan that works better for you.
Simply put, now is a great time to refinance for many homeowners across the U.S. "We estimate that 35 percent of outstanding mortgages are now 'in the money,' meaning borrowers may realize significant cost savings by refinancing," Fannie Mae senior vice president and chief economist Doug Duncan said.
Some common refinancing goals we often hear are: “I want to lower my monthly payment,” and “I don’t want to pay mortgage insurance anymore.” But there are other cases of when you may want to decide if refinancing is best for you, so we’ve narrowed down the top 7 reasons to refinance your home:
- You want a lower monthly payment: If you’re trying to relieve some pressure from your monthly mortgage payment, you can look in to lowering your payment by refinancing to a lower interest rate and/or extending your loan term to help make ends meet.
- You have a conventional loan and are currently paying PMI but want to get rid of it: Private Mortgage Insurance (PMI) can add hundreds of dollars to your monthly mortgage payment. One of the ways you can remove PMI from your mortgage payment is to refinance it. After you get a feel for the value of your current property from an appraisal, if the value of your home is 80% or less of the home’s current value, PMI can typically be dropped.
- You have an adjustable rate mortgage (ARM): There are several reasons as to why refinancing from an adjustable rate to a fixed-rate mortgage is a good idea. For starters, your budget is at risk if you’re currently in an adjustable rate mortgage. A fixed-rate home loan provides more stability, allowing you to plan for your future with more certainty. Another good reason to get out of an ARM is to reduce your interest rate risk while rates remain at historic lows—this will save you money long-term.
- You have an FHA loan and pay mortgage insurance: Switching from an FHA to a conventional loan gives you the opportunity to remove mortgage insurance (MIP). With a conventional loan, you can eventually drop the mortgage insurance once you’ve paid down the loan to a certain amount (usually about 78% of the value of the home loan). If you still need mortgage insurance when refinancing your mortgage, it’s typically cheaper with a conventional loan.
- Your current interest rate is higher than what’s available today: If your home loan’s interest rate is higher than what’s currently available, it’s time to refinance to save some money. You can even cap your interest rate with Rate Secured to ensure you get a low rate.
- You want to change your loan term: This is a great way to get out of debt earlier if you’re refinancing from a 30-year to a 20-year, or even 15-year mortgage. Shortening your loan term may raise your monthly mortgage payment, but it will pay off long-term with less going toward interest on the loan. For example, a 15-year refinance loan is a good option if you want to get a lower rate to pay off your mortgage quicker and become debt-free. If interest rates are low, you could potentially save tens of thousands of dollars over the course of the loan by refinancing to that lower rate.
- You want to stay in your home but need to make some updates: If you’re looking to make some upgrades to your current home, it’s good to look at all your options. With this option, your refinanced loan will be for a greater amount than your existing home loan, and you receive the difference between the two.
For more information about refinancing your current mortgage, schedule a quick 10-minute call with one of our expert Home Loan Specialists to help you figure out what’s best for you and identify opportunities to save time and money!