If you’re like most homeowners, you’re always looking for ways to save money. One of the best ways to do that is by refinancing your home loan.
But when is the best time to refinance? And how can you make sure you get the best deal?
In this article, we are going to do a deep dive into some of the main reasons why you would want to refinance your home.
But first, there are a few things to keep in mind when refinancing:
Current home equity
Equity is the amount of your home’s value minus what you currently owe. You’ll need at least 20% equity in your home to be eligible to tap into your equity or remove your PMI through refinancing. However, you can refinance with as little as 3% equity in your home.
Credit scores
Your credit score is another important factor to consider when refinancing. A good credit score means you’ll likely qualify for a lower interest rate, while a lower score could lead to a higher interest rate and may not allow you to refinance at all.
Long term goals
Your long-term goals should also be considered when refinancing. If you plan to stay in your home for a few more years, refinancing to a shorter loan term could save you money on interest payments. However, if you plan to sell your home shortly, refinancing to a longer loan term could make more sense.
If you have a good amount of equity in your home and you have a short outlook to stay in it, you could also consider an Adjustable rate mortgage. An adjustable-rate mortgage (ARM) offers a 30-year term with a low teaser rate that stays fixed for a period of time – typically 5, 7 or 10 years – before it adjusts up or down, depending on what the market is doing. With an ARM, you’ll be able to get a lower rate than a fixed mortgage and thus allow you to save even more money every month.
Refinance closing costs
Just like with everything in life, refinancing is not free. You should also consider the closing costs to find out what your break-even point is. This is the point where your refinance costs have been paid back by the savings from your refinance.
OK, but we still have not talked about the reasons why you should consider a refinance. Let’s do that now.
Reason #1 - Get a lower interest rate
When rates are low, savvy homeowners take advantage of refinancing to lower their current interest. This can save a lot of money, especially over time.
For example, let’s say you have a $200,000 mortgage with a 4% interest rate and you’re paying $955 per month. If you refinance to a 3% interest rate, your monthly payment would drop to about $865 – a difference of $90 per month.
Over 30 years, that refinance would save you about $32,000 in interest payments.
Reason #2 - Tap into your home equity
If you’ve been living in your home for a few years, chances are good that your home has gone up in value and you have some equity built up. But over the last 2 years alone, home values have gone up an insanely 20-30% annually and maybe, even more, depending on where you are.
When you have a sizable equity position, you can refinance your mortgage and take cash out of your home equity to use for other purposes, such as home improvements, investing, paying off debt, or even taking a vacation. Just keep in mind that the more cash you take out, the higher your monthly payments will be and the longer it will take to pay off your loan.
You can take advantage of a cash-out refinance through Conventional loans, FHA, VA, and Jumbo loans. The maximum loan amount that you can take with both conventional and FHA is 80% of the property’s value.
Here is a guide to show you the maximum loan to value allowed for cash out refinance for most owner-occupied home loans.
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Conventional Loan 80% Loan to Value
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FHA Loan 80% Loan To Value
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Jumbo Loan 75% Loan To Value
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VA Loan 100% Loan To Value
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USDA Loan N/A
USDA loans do not allow a cash out refinance
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Non-QM Loans 75%-80% Loan To Value
Non-QM loans such as bank statement loans, P&L loans and asset depletion programs may allow a maximum 75-80% loan to value
Reason #3 - Consolidate debt
If you have high-interest debt, such as credit card debt or student loans, consolidating this debt with a refinance can help you save money on interest and get out of debt faster.
For example, let’s say you have $20,000 in credit card debt with an annual interest rate of 18%. If you were to refinance your mortgage and include this debt in the loan, you could potentially get a lower interest rate. This would help you save money on interest and pay off your debt faster.
To consolidate debt with a refinance, you will need to have enough equity in your home. The amount of equity you need will depend on the type of loan you’re applying for.
For example, if you’re applying for a conventional loan, you can typically refinance up to 80% of the value of your home. So, if your home is worth $200,000, you could refinance up to $160,000.
If you’re approved for the loan, you would then use the money to pay off your debt. You would be left with one monthly payment – your mortgage payment – which can help make your finances more manageable.
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Reason #4 - Get rid of Private Mortgage Insurance (PMI)
If you put down less than 20% when you bought your home, chances are good that you’re paying PMI. This is an insurance policy that protects the lender in case you default on your loan. For those who have an FHA loan, the mortgage insurance, known as MIP, remains for the life of the loan.
If you have a conventional loan, you can eliminate PMI once your loan-to-value ratio reaches 80%. This normally happens somewhere between 5 and 10 years into your loan term. If you have enough equity in your home, you may be able to refinance and drop the PMI, thereby, allowing you to save money on your monthly payments.
Reason #5 - Refinance an ARM to a Fixed Rate Mortgage
An adjustable-rate mortgage, or ARM, is a type of home loan where the interest rate is not fixed for the life of the loan. Instead, it changes periodically, typically about an index, and is adjusted up or down as the index changes. This means that your monthly payment could go up or down over time, which can make it difficult to budget for your mortgage payment.
However, one benefit of an ARM is that it usually has a lower introductory interest rate than a fixed-rate mortgage. Normally, this introductory period can last 5, 7 or 10 years. This can save you money in the short term and may make it easier to qualify for a loan.
A homeowner may consider taking advantage of a refinance by switching their loan from an ARM to a fixed term. Many of our clients have gone from adjustable rate mortgages to 15-year or 20-year terms to pay off their homes faster.
Reason #6 - Get a shorter term loan
One of the best things you can do for your finances is to pay off your mortgage as quickly as possible. When you refinance, you have the opportunity to switch to a shorter loan term if you qualify. This will increase your monthly payments, but it will also help you save money on interest and pay off your home sooner.
For example, say you’re 10 years into a 30-year mortgage with a 4% interest rate and owe $140,000 on your home. You could refinance into a 15-year mortgage at 3.125%. Your new monthly payment would be about $1,040 – which is an increase of about $370 from your current payment.
While this may seem like a large increase, consider that you would save more than $96,000 in interest payments and pay off your home nearly 15 years sooner.
Refinancing into a shorter loan term can also help you build equity in your home faster. This is because a larger portion of each payment will go towards the principal balance of your loan rather than the interest.
Reason #6 - Remove a borrower from the current loan
If you have a joint mortgage with someone and you want to remove them from the loan, you’ll need to refinance the mortgage. This is because a mortgage is a contract between you and the lender, and it can’t be changed without the lender’s consent.
When you refinance, you’ll essentially be taking out a new loan to pay off the old one. You’ll need to qualify for the new loan on your own, which may be difficult if you have bad credit or a high debt-to-income ratio. But if you can qualify, refinancing will allow you to remove the other person from the mortgage and take on the loan yourself. In addition to removing the other person from the current loan, you may be able to take them off the deed completely as well.
While there are many reasons to refinance, the most common motivators are to secure a lower interest rate, shorten the loan term, or switch from an adjustable-rate mortgage to a fixed-rate mortgage. Refinancing can also be a way to access the equity in your home, which can be used for home improvements or other major expenses.
When done wisely, refinancing can save you money and help you reach your financial goals. However, it’s important to weigh the costs and benefits of refinancing before making a decision, as there can be fees and risks involved. Ultimately, whether or not to refinance is a personal decision that depends on your unique circumstances.
Our team is here to help you decide if refinancing is the right option for you and walk you through the process every step of the way.
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