Should You Refinance Your Mortgage?
JENNIFER LAMPE - January, 20th 2022
At some point during your mortgage term, you may consider refinancing your current loan. Whether your goal is to consolidate debt, take advantage of some better interest rates or take some money out against the equity of your home, you will want to make sure it is the right time for you. Here are four scenarios in which you may find it beneficial to refinance your mortgage.
Reason #1: To Obtain a Lower Interest Rate
One of the most popular reasons for refinancing a current mortgage is to take advantage of interest rates that are lower than when you took out your original loan. When considering refinancing at a lower interest rate, take into account the closing costs and fees that will be associated with a refinance to make sure it is worth the switch. Prepare to pay between two percent and five percent of your loan's principal amount in closing costs when refinancing your mortgage.
Reason #2: To Consolidate Debt
Unfortunately, debt such as credit cards and high-interest loans can result in a significant amount of interest paid during the repayment period. Some homeowners may be able to use their home to help pay off this debt and repay the money at the lower mortgage interest rate. When considering this option, be sure to calculate the amount of interest you will pay throughout the life of your mortgage, and see if this repayment method will be the most cost-effective for your finances.
Reason #3: To Eliminate Private Mortgage Insurance
If the home was originally purchased when you had a poorer credit score or a lower amount for a down payment (typically less than 20 percent), you were likely placed with a loan that required private mortgage insurance (PMI). PMI results in a higher monthly payment for insurance to protect the bank in the event of a foreclosure. Once you have established equity in your home, you may be able to refinance to remove the PMI and obtain a lower monthly payment.
Reason #4: To Change the Mortgage Term
When you first buy your home, you will often determine the term of your loan based on what you are approved for and how much you can afford for a monthly payment. As with anything in life, your situation can, and often does, change. You may find yourself wanting to refinance your mortgage to be able to shorten the term of your loan to pay less interest over time and get your house paid down earlier. If you are having a harder time affording your current payment, you may consider refinancing to extend the term of your mortgage and reduce your payment to make it a better fit with your current budget. Common term lengths are 30, 20 and 15 years.
Depending on your needs, refinancing your mortgage could be a beneficial option for you. It is important to work with a reliable Mortgage Advisor who can assist you in making the right decision. They can help you understand any potential costs, drawbacks, or benefits from refinancing that are unique to your financial situation.