Thinking of doing a refinance on your home mortgage? There are plenty of reasons to go through the trouble of a refinance. And by trouble, I mean paperwork. Here are some of the reasons that you might consider going through the ordeal of a home mortgage refinance.
Interest Rates Have Dropped
This is probably the biggest reason to go through all of the paperwork and trouble of a mortgage refinance. If mortgage rates have dropped significantly since you obtained your mortgage, you may be able to save considerably, easily hundreds of dollars a month.
Keep in mind that a refinance will cost you money in fees, so you have to get a certain amount of interest rate drop to make it worthwhile. The rate that it makes it worthwhile depends a great deal on how long you intend to be in the home.
If you plan on being in the home for some time, a 1 point decrease might be enough to make the transaction worthwhile. If you plan to be in the home for a limited time, it might not make sense to refinance unless you can get a 2 point drop or greater.
To make your decision, you need to figure out the cost savings of refinancing and compare it to the cost. See how long it will take for you to recoup the closing costs. It you plan on being in the house long enough to recoup the costs, it is probably worth refinancing.
You Need To Pull Money Out
A cash out refinance is a great way to get money for a number of things.
One of the most common reasons to do one is to pay off credit cards. Credit card debt at 17% (the national average) is very expensive and if you can essentially refinance that debt at less than 5 percent, that represents a significant savings.
In addition, a cash out refi can be used to finance a number of home improvement projects Take the cash and put in a new kitchen, redo your bathrooms or even invest in a swimming pool.
Using the equity in your home can save you money on so many projects. Just as long as the interest rates for financing are higher than you mortgage interest rate, a cash out refinance is usually a good decision.
To Remove A Borrower
Things happen in life and sometimes you may need to remove a borrower from a loan
This happens most in the case of divorce. A refinance can successfully remove a borrower form a loan. This can help a person move on after a split as there is a sense of closure in completing this task.
If this is a situation that you are going through, it can help you move on from the situation and begin anew.
To Get Rid Of Mortgage Insurance
It used to be that with an FHA loan, the mortgage insurance would drop once you had sufficient equity. This is no longer the case. If you put less than 10% down on your home, the mortgage insurance never drops off. If you put over 10% down, it will drop off, but only after 11 years.
For this reason, refinancing has become a necessity. It is a way to remove an easy 250 dollars a month in mortgage insurance costs, give or take.
Even if the interest rates are higher on the refinance, it is often beneficial to proceed with the refi due to the extremely high cost of mortgage insurance.
To Get A Fixed Rate
Have an adjustable rate mortgage that is about to adjust? A refinance can lock you in at a low rate and prevent the interest rate fluctuations in the future.
Stop the wondering about what your rates will be and lock in a rate that you can count on for years to come. Budgeting is so much easier if you can take out future rate changes that come with an adjustable rate mortgage.
You Need To Lower Your Payment
Even if interest rates are similar, it may make sense to refinance your mortgage if it lowers your payment and you need to do so to make it affordable.
If, for example, you have paid off 5 years of a 30 year mortgage, you can refinance for a 30 year rate again. This can lower your payment to an affordable level if your finances have changed.
You Want To Lower The Term
Switching from a 30 year to a 15 year loan can reduce your interest rate.
The payment increase may actually not be that significant because of the interest rate reduction. If the payment goes up minimally and the term cuts nearly in half, it might be a great deal to refinance to a shorter loan term.
Depending on your situation, switching to a 15 year loan might only increase your payment by 300 dollars but it could cut your term in half. Imagine owning your home outright in 15 less years.
Tina’s Final Thoughts
There are a lot of good reasons to finance a loan but it is hard to say whether it is worth it to you and your particular situation. To do so, you really need to sit down and do the math.
The best way to go about things if you are considering a refinance it to consult a qualified mortgage broker. Just make sure that they show you on paper just how refinancing will benefit you financially.