When you refinance your mortgage loan, you are essentially replacing your existing loan with a new one. There are many benefits to refinancing a loan, and today, we’re going to explore each one of those reasons.
Top Reasons to Refinance:
Do you think you’re paying too much for your mortgage? Do you believe your interest rate is too high? Refinancing is a great way of reducing your interest rate while also making monthly payments more affordable. Obtaining a lower interest rate and capitalizing on the lower monthly payments can also help borrowers pay off their loans more quickly.
Speaking of home equity, a cash-out refinance enables consumers to access the equity they have built into their homes. This money could be used to pay for a child’s education, cover medical expenses, fund a business venture or even to invest in additional real estate. This is what makes homeownership a great wealth-building investment.
Want to pay down your mortgage faster? Refinancing from a 30-year fixed into a shorter-term loan, such as a 15-year fixed, could allow you to reduce your interest rate while also paying off your mortgage a lot faster—perhaps without a significant increase in your monthly mortgage payment.
While some want to pay off their mortgage faster, others may be looking to decrease their monthly payment. If this is the case, refinancing to increase your loan term from a 15-year term to a 30-year will cost you more interest, but could reduce your mortgage payment to a more manageable and sustainable amount.
If you have an adjustable-rate mortgage (ARM), refinancing will enable you to switch to a fixed-rate mortgage to prevent your monthly payment from increasing any further.
It’s entirely possible to switch from a 30-year fixed-rate mortgage to an ARM if you would like some payment relief, or simply feel you’re overpaying. It’s also possible to refinance out of one ARM into another to not only obtain a new interest rate but to also restart the fixed-rate period on the new ARM. Plenty of wealthy individuals more from ARM to ARM to take advantage of cheap short-term rates while they put their money to work elsewhere.
An Interest-Only loan period typically only lasts 10 years before the mortgage must be paid back in full. A borrower with an interest-only mortgage might refinance to avoid a steep monthly payment increase or to refinance out of the Interest Only product into something fully-amortizing. In some instances, they may even choose another Interest Only product to extend the benefits that Interest Only loan products offer.
If you’re sitting on a lot of home equity, you may decide it’s time to make interest-only payments in order to improve your monthly cash flow. This can free up cash for other expenses, or investment opportunities. This also allows you to diversify your monthly spending and put your money into other things, rather than putting all of your eggs in one basket.
Has your FICO score improved? Did you remove negative issues on your credit? Perhaps your home value has increased significantly enough to push your LTV (loan-to-value) ratio into a lower tier. All of these reasons may make refinancing worthwhile. If your borrowing profile has improved since you first applied for a mortgage, it may be time to refinance and obtain a lower interest rate than what you previously qualified for.
In certain circumstances, you may need (or want) to add or remove someone from the title or the mortgage. If this is the case, a refinance may be right for you. We see this happen most frequently with divorces, or with a child who is wanting to remove their parents as co-borrowers on their loan.
Home values are known to seesaw over time, depending on the housing market. If you expect fluctuations in the housing market, it could be a good idea to tap into your interest now, to obtain that money for the future. Many investors will typically refinance while home values are high and then put that money to work elsewhere.
We spoke about switching loan products to drop mortgage insurance, but you can also dump private mortgage insurance by refinancing, if you have a low enough Loan to Value (LTV) ratio. If your home has increased in value, or you have paid it down enough to remove the PMI, a refinance could potentially save you a lot of money by reducing your interest rate and getting rid of your PMI payment. It’s a one-two punch! \
If you’ve come across a large sum of money and have the ability to pay down a big chunk of your mortgage balance, it may make sense to refinance. Making a large mortgage payment then refinancing will allow you to pay off your mortgage more quickly while reducing your monthly mortgage payment and interest.
This is a classic reason to refinance. If you have multiple mortgages and want to consolidate them into a single loan, a refinance is often a great way to accomplish this. Many second mortgages have high interest rates or are adjustable (hello, HELOC), so this may be a conservative money-saving move for you.
Credit cards, personal loans and other types of debt tend to have higher interest rates than mortgages. Refinancing is a good way to consolidate your debt, allowing you to pay the debt very slowly, making it easier for you to manage.
You may want to refinance to take advantage of a loan program before it’s gone. This could be a program like HARD, which allows underwater borrowers to refinance, or there could be a change in guidelines like FHA’s recent move to lower the max LTV on cash out refinances from 85% to 80%. There may also be a program being offered for only a limited time. In this instance, it would be wise of you to take advantage of the program now, to avoid missing out.
One final reason to refinance is simply because you can. There’s never a guarantee you’ll qualify for a mortgage in the future. Heck, it’s possible you might need today’s low-interest rates just to stay below the Debt to Income (DTI) limit. You could run into some sort of financial hardship, like a job loss (or global pandemic), or rent out your home that you later wish to refinance. If this is the case, it may make sense to refinance now, while you know you will qualify.
While there are many benefits to refinancing, homeowners should weigh the pros and cons, research current interest rates and speak to a mortgage professional before choosing to refinance their home.
Contact us today and speak with a mortgage originator to learn if refinancing is right for you.
