Having a mortgage can feel like a big financial weight. Carrying that home loan for up to 30 years through all of life’s different financial seasons is a challenge, particularly during times when your finances get a bit tight. Jobs can be lost, medical bills come up, and children go to college. That’s why refinancing your mortgage at the right time, according to your financial situation as well as market trends, can benefit you during seasons down the road when money gets tight. Here’s what you need to know about home refinancing.
What does refinancing mean, and what are the benefits?
Refinancing your mortgage basically means you’re taking out a new home loan to pay off your existing one. When the market’s mortgage rates plummet below that of your existing rate, it’s a good time to start considering a refinance. You’ll essentially go through the same process you did with your first loan by meeting loan requirements and going through the closing process. There are many benefits to refinancing that will put your hard-earned money back into your pocket.
Refinancing could ultimately lead to higher overall savings on the lifetime of the loan due to the lower mortgage rate. This means you’ll end up paying less for your home overall, and you could even shorten the life of your loan to get it paid off faster.
No more PMI
Private mortgage insurance, or PMI, is required on certain types of mortgages and for those that leave less than 20 percent equity on your home. PMI protects the lender and reduces their risk. If the equity on your home is currently high enough, or your home’s value has increased, you may be able to stop paying your PMI.
Lower monthly payments
The biggest benefit of refinancing your mortgage is lowering your monthly payments. With the lower mortgage rate and PMI removal, you’ll find that your monthly payments have come down. Keep in mind that refinancing means you are taking out a new loan. Since there will be closing costs on the new loan and your interest payments are tacked on to the earliest payments, you may not see a significant change in your monthly payments for several years.
Who should (and shouldn’t) refinance?
Refinancing a mortgage is certainly beneficial to some homeowners, especially if the market’s average mortgage rate is on the decline. However, there are some financial situations in which a refinance will actually cost you more money. Let’s discuss who should refinance and who should wait until financial conditions are more beneficial.
How is your credit?
If your credit score has increased since you originally took on your mortgage, chances are a refinance will benefit you since you’ll be able to take advantage of a lower mortgage rate. However, if you’ve recently taken out a car loan, a new line of credit, or if your credit score has lowered for some other reason, the interest rate that would be available to you in a refinance could be even higher than the one you currently have. If your credit score could use a little work, it’s best to wait a while and pay off some of your other debt before refinancing your mortgage.
How long will you be in your home?
As we discussed previously, closing costs and interest will be added to the front-end payments of your new mortgage. Since these costs may take a few years to pay down, your monthly payments will be higher for those years. If you’re planning on selling your home in the next few years, a refinance is probably not a great option for you since your monthly payments will be their highest during the few years you plan to stay in your home. If you plan on staying in your home for many years, though, you’ll see those monthly payments decrease during the life of your loan.
What’s your home’s value?
The value of your home plays a big role in the interest rate you can get when refinancing. For example, if your home’s value has increased significantly since the start of your original loan, you’ll have more equity, you may qualify for a lower interest rate, and you may be able to ditch your PMI, as we previously discussed. However, if your home’s value has decreased, the opposite may be true. You may get a higher rate than you anticipated.
What’s the first step?
If you think refinancing your mortgage right now may benefit you, the first step will be to find out for sure. You can use any number of refinancing calculators available online, or you can talk to your financial institution to find out the specifics of a possible new loan. Carefully compare your old and prospective new mortgage to determine whether a refinance is the right move for you.
While refinancing your mortgage can be a great tool in saving money, deciding whether you should refinance right now is a decision that should be based on the current market and your current financial situation. You want your home loan to give you the most that it can, so you’ll want to crunch the numbers on both your old and new loan to be sure it’s the best option for you. If your financial situation allows for it, refinancing may be a great option for you and your financial goals.