When you refinance your home, you are swapping out an existing mortgage loan for a new one. This can help you save money on your monthly payments or tap into your home equity. But there are a lot of things to consider, so you have to be careful and do your research.
Lower Interest Rates One of the most common reasons homeowners refinance is to get a mortgage with lower rates. The rates are often so low that borrowers can save significant amounts of money over time, even if the monthly payments increase slightly.
Refinancing can also give you the option of reducing your term length, which means that your interest rate will be lower over the life of your new loan. Choosing to reduce your loan term can also help you pay off your mortgage more quickly, which is an advantage in the long run.
Eliminate Private Mortgage Insurance (PMI) If you bought your home with less than a 20% down payment, it is likely that you are paying PMI in addition to your principal and interest payments. Refinancing can eliminate your PMI, saving you hundreds of dollars a month in payments.
Access Cash from Home Equity Another pro of refinancing is that you can use your home equity to pay off other debts or fund a big expense. This can be particularly useful if you need to do a large home improvement project or have an unexpected medical bill that needs paying off.
Getting More Home Equity If youve gained significant equity in your home since you first purchased it, it may be worthwhile to refinance for a larger amount than you still owe on the original mortgage. This can mean you can access that equity in a lump sum or in smaller payments, which could make it easier to pay off your debts or finance a large purchase.
Refinancing can be a complex process and can have some hidden fees, so its important to do your homework before you start the process. Closing costs, including application and origination fees, can range between 3% and 6% of the loans total amount, so be sure to factor them into your decision-making process.
Its also a good idea to calculate your breakeven point, which is the time it will take you to recoup your refinancing expenses. This can be done by comparing the cost of a new mortgage to the savings you will receive from the lower interest rates.
In general, you should weigh the pros and cons of refinancing based on your current financial situation, the state of the market, your goals and more. If you have a strong credit score, a steady income, and an excellent debt-to-income ratio, refinancing is likely a sound decision for you.
If youre still on the fence, it is best to talk with a mortgage expert and ask them their opinion. They can point you in the direction of lenders who are more likely to help you.