Over the past couple of years, mortgage rates have dipped down to the lowest levels in history. This has led to a surge in refinancing activity as homeowners take advantage of the lower rates.
But maybe you’ve stayed in the sidelines when it comes to refinancing because you are not too sure if it’s something that you should take be taking advantage of.
In this article, we are going to talk about some of the main reasons why you should consider a mortgage refinance and how you can go about it.
First of all, what is a refinance?
In short, refinancing is when you get a new mortgage to replace your current one. This new mortgage has to have a “Net Tangible Benefit” for you, the homeowner. This is a safeguard so that predatory lenders don’t take advantage of homeowners.
So, why refinance?
There are many reasons why refinancing might be a good idea for you. Let’s take a look at some of the most common ones:
A lower interest rate
This is the main reason why homeowners look into refinancing. And the reason why is because it opens the door to multiple options. Let’s look into them:
To lower your monthly payments:
For instance, a homeowner with a $400,000 mortgage balance with a 5%, 30 year fixed rate would be paying $2,147.29 a month in principal and interest.
If he/she could refinance at a 3% rate, the monthly payment would now be $1,686.42; a difference of $460.87/month.
To pay off your loan faster
Taking the same example above, a homeowner with a $400,000 loan balance with a 5% rate over 30 years would pay roughly $373,000 in interest payments. By refinancing to a lower rate and a lower term, the savings would be substantial. For example, if a 15-year loan was being offered at 2.5%, the total interest outlay would be $80,088. Therefore, you would save almost $293,000 in interest payments and cut 15 years off the loan!
*Remember, these are just hypothetical numbers and not a quote or a representation of where rates are as of the time of this publishing.
Tap into your home equity
A refinance can give you access to the equity you’ve built up in your home, letting you borrow against it for other purposes. This could be a great way to pay for major expenses or get some extra cash for a rainy day.
There are a few things to keep in mind when you’re considering a home equity refinance:
First, a cash out refinance will allow you to take a loan up to 80% of your home’s value. Meaning that if your home is worth $500,000, you could take a loan up to $400,000.
Assuming that you had an existing mortgage for $300,000, you would have access to borrow $100,000 worth of equity, while the remaining equity stays in the house.
You could also combine different strategies with a cash out refinance. For example, if you are paying PMI with your current loan, you could eliminate it as your refinance would be no more than 80% LTV. You could also get a lower term on your mortgage to pay off the loan faster.
However, one of the things you definitely need to make sure is that you understand how the new loan will affect your monthly payments. If you borrow more money, your payments may go up.
Finally, the money that you borrow is tax-free. This is definitely one of the main advantages of borrowing against your equity because there’s no tax liability.
All of this sounds good, so when should you refinance?
There is no definite timeframe on when you should refinance but here are a couple of rules of thumb:
If you just bought the house, you are eligible for a refinance after you make 6 consecutive payments. If you are taking cash from the equity, you have to be on the title for at least 12 months.
You want to refinance when rates have dropped. This allows you to maximize the benefits of refinancing.
Other unusual benefits and reasons why you should refinance:
- To remove someone off the current mortgage and title of the property
- To add someone else to the loan
- For a reverse mortgage
- To consolidate 2nd mortgages that are on the house
- In divorce proceedings, if one person is keeping the house, he/she will have to put the loan on their name
In conclusion: Refinancing has lots of benefits but your goals determine why and when you should.
You should consider your objectives, the length of your loan, your interest rate, and all associated expenses when deciding whether or not to refinance. Refinancing a mortgage loan might be quite beneficial to many people, but it’s crucial to do your homework before committing completely.
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