Updated: Jun 30, 2021
Are you a homeowner considering refinancing because the rates are low but still not sure if it’s right for you? There are more things to consider than just lowering your mortgage rate, in this post we will go over:
Benefits of refinancing
When does it make sense to refinance
What’s a good mortgage rate
4 common myths of refinancing
First things first, to know if it’s the right time to refinance, you want to determine how long you plan to stay in your home. If you plan on living in your home for longer than 2 years, refinancing may be something to consider.
Benefits of refinancing
A better mortgage rate is one of the most common reasons to refinance. If the rates are low and your current mortgage rate is higher, you can often save money by refinancing into a new loan. You can also lower your monthly payments by extending your payoff date which means you will be paying less principal each month.
Shortening your term is another strong benefit to refinancing. Most mortgage loans are for 30 years. So if you’re looking to pay off your home faster, you can refinance to a 15-year fixed-rate mortgage. This will save you a lot of money in interest over the life of the loan.
A cash-out refinance is when you use your home equity to get funds for a purpose. You will receive the funds at closing and the amount added onto the mortgage principal you owe. Mortgage rates tend to be lower than other types of rates like credit cards and auto loans so it can be a very cost-efficient way to use your equity.
Refinancing to cancel mortgage insurance (PMI) is also common. Though, you can only do this once you have reached 20 percent equity. This also applies to certain FHA home loans that require mortgage insurance for the life of the loan.
When does it make sense to refinance?
If the mortgage rates are falling below your current loan rate then it could possibly be a good time to refinance. Here are other good reasons to refinance:
If you’re looking to pay off the loan faster with a shorter-term
When you’ve gained enough equity in your home to refinance into a loan without mortgage insurance
If you have equity to take advantage with a cash-out refinance
If your finances and credit are good, then speaking with a mortgage expert can be beneficial for you. You can contact us for more information. Let’s move on to our next topic.
What’s a good mortgage rate?
Mortgage refinance rates change throughout the day, every day. Avoid focusing so much on low mortgage rates you see being promoted. A mortgage refinance rate is mainly focused on your credit score and equity you have in your home. Get a competitive rate by keeping track of your credit score and having a steady proof of income.
Refinancing for half a percent or 1 percent may seem like it’s not worth it but it varies on your situation. If you’re refinancing to get rid of private mortgage insurance (PMI) and going into a conventional loan, half a percent can make a huge impact on your monthly payments.
4 Common myths of refinancing
Many homeowners have refinanced their homes at least once during their term, thanks to low-interest rates. For first-timers who have considered refinancing, there are a few myths you should know about. The first one being ‘it’s free to refinance’.
Refinancing is not cost-free. Yes, you can save by refinancing on your mortgage, but that doesn’t mean it’s free to do so. There are fees you’ll have to consider which can amount to as much as 2 to 5 percent of the principal of your mortgage. For example, if your fees are 3 percent on a $300,000 mortgage, then your payment is $9,000. Most lenders will include that into your new loan so you won’t pay it out of pocket.
The second myth is that you won’t need a credit check. Before applying for a refinance, check your credit score and DTI ratio. A lender will check your credit score because it’s considered a new loan and they need to make sure your current state of finances are up to par.
Another common myth of refinancing is that you can only do it once. There’s no limit on how many times you can refinance your mortgage. Consider speaking with a mortgage expert to see if refinancing is a route you should take.
Myth number 4 is the interest rate is the most important thing. The lowest interest rate possible is good to maximize savings, however, the term of the loan is also a savings variable you must consider before refinancing. When you refinance to a loan with the same term, you end up resetting the payment clock. This adds time and money to your mortgage which can end up being costly.
Now that we have discussed the details and most common questions about refinancing, are you ready to take the next step and speak with us about your options? Schedule a call with us today. It’s completely free and strictly educational. Be sure to follow us on Instagram for daily mortgage tips.