1. Finance

Things to Consider for Refinancing Your Home

Disclaimer: This is a user generated content submitted by a member of the WriteUpCafe Community. The views and writings here reflect that of the author and not of WriteUpCafe. If you have any complaints regarding this post kindly report it to us.

Refinancing your home can be a perfect way to save money on your monthly mortgage payments, and in some cases, it can also help you pay off your home loan faster. But, you should consider many different factors before refinancing, which will help you find the best possible solution for your financial situation and needs. Mortgage refinance rates are at historic lows, so now could be a great time to refinance your home. This guide will provide you with every detail you need to know about refinancing your home, including what refinancing is, things to consider when refinancing, and how to decide if now is the right time to refinance your home.

What Is Refinancing?

Refinancing is the process of taking a new loan to replace an existing loan on your home. For example, when you refinance a house, you typically take out a new mortgage, which will replace your current mortgage. Why would you want to do this? Well, there are a few reasons.

  • Take advantage of a lower interest rate to save money.
  • Reduce the length of your mortgage.
  • Swap from a fixed-rate loan to an adjustable-rate mortgage.
  • Get cash out of your equity to make home improvements or pay for other expenses.
  • Eliminate private mortgage insurance (PMI).

Why Isn't Everyone Refinancing If It's So Beneficial?

You may be curious why more people don't refinance if it's a great way to save money. There are a few reasons why refinancing may not be right for everyone.

  • You could end up paying more in interest over the life of your loan if you refinance to a longer loan term.
  • You may not have adequate equity in your home to qualify for a refinance.
  • It could take you longer to recoup the closing costs associated with refinancing.
  • When refinancing, your credit score might not be high enough to qualify for a new loan. 

Things to Consider Before Refinancing

  • Refinancing isn't for everyone. So before diving into a new loan, no matter how great the interest rate is, there are always a few things to consider.
  • The interest rate of your mortgage is the cost of borrowing money. Or, to put it another way, it's the price you pay for your home.
  • The term of your mortgage is how long you have to pay back the money you borrowed. The common mortgage terms are 30 years and 15 years.
  • Your mortgage payment is the amount you pay each month toward your principal balance and interest.
  • Mortgage rates can change daily, so it's essential to watch the market and understand when rates are low.

Below is a list of things to think about.

 Your Break-Even Point

You can use a straightforward calculation to see whether refinancing is appropriate for you. Finding your break-even point is what “Better Mortgage” calls it.

There's a simple equation to see whether refinancing will be beneficial to you.

Divide the closing costs by monthly savings. Multiply that by the number of months left on your first mortgage. This is called your break-even point.

If you have to leave your place for longer than this period, it's good to refinance because you'll be saving money. If not, then there may not be enough benefit to justify the closing costs.

You'll have to decide whether it's worth refinancing your mortgage.

Private Mortgage Insurance (PMI): Will you or won't you? 

If your down payment were less than 20% of the value of your property, you'd almost certainly be paying Private Mortgage Insurance (PMI). The PMI certification ensures that lenders are protected if the borrower cannot make their mortgage payments.

PMI premiums, on average, cost between 0.58 percent and 1.86 percent of the original loan amount each year. In many cases, you will only have to pay PMI until you reach 20% equity in your property. If the deal of your property has increased, refinancing may allow you to stop paying PMI completely, depending on your Loan to Value Ratio.

Calculate your Loan-to-Value (LTV) ratio

After calculating your down payment, the loan-to-value ratio (LTV) is the proportion of a property's value you'll need to borrow. If you put down a 20% down payment, your LTV is 80%; if you put down a 10%, it's 90%, and so on.

If your LTV is 80 percent or less, you're more likely to get approved for a home refinance. The lower your LTV, the easier it is to qualify for a reduced interest rate.

Mortgage Term Loan

Shortening your mortgage term without necessarily lowering your monthly payments is referred to as “refinancing.”

You have a 30-year fixed-rate mortgage on a $100,000 property. Refinancing from a 9% interest rate to a 5.5% one can reduce the term by half, to 15 years, while only a tiny change in the monthly payment is necessary. But, if you choose to keep the same monthly payment amount, you can cut the loan term even further, to 10 years.

The shorter the loan term, the more you'll pay in interest. But if you're looking to reduce the interest, you're paying. This is a great way to do it. local mortgage lenders can help you crunch the numbers to see if this is the right option.

Tapping into Home Equity

Cash-out refinancing is refinancing to take advantage of your home equity. When you refinance your house for a greater amount, you may make the difference in cash.

Because you may lose more equity in your house than before, closing costs for this sort of loan might be hefty in certain situations. So take as much money out of your house as you need, and make sure you have a comfortable equity buffer.

Conclusion

Reducing monthly payments and taking advantage of your home equity by refinancing is a wonderful method to save money. When considering refinancing, you should consider some factors, including your break-even point, the cost of private mortgage insurance, and your loan-to-value ratio. Additionally, there are different options for refinancing, including shortening your mortgage term or taking cash out of your home equity. Ensure to consult with your local mortgage lender to see if mortgage refinancing is the right decision for you.

Login

Welcome to WriteUpCafe Community

Join our community to engage with fellow bloggers and increase the visibility of your blog.
Join WriteUpCafe