Refinance Options

It is a common practice for homeowners to refinance their home when it is to their benefit. A refinance is when an existing homeowner applies for a new mortgage to replace the existing mortgage. It is not a modification or revision of the existing loan. It will pay off and take the place of the existing mortgage.

There are many different reasons why people choose to refinance their home. The following is a list of some of the more popular reasons people will refinance their home.

Lower Your Interest Rate

The most popular reason that people refinance is to lower their interest rate. When rates drop, homeowners can review their current loan to see if it makes sense to refinance to a lower interest rate. The two main benefits of doing so are:

  • Lower your payments and increase your monthly cashflow
  • Pay much less interest over the life of the loan, therefore increasing your net worth

There are closing costs involved in a refinance. If you have enough equity, you can roll your costs into the new loan and avoid out-of-pocket expenses. You can use our mortgage calculator to calculate a payment and see if a refinance makes sense for you.

Get Cash Out

When homeowners have sufficient equity (home value – mortgage balance) in their home, they may choose to refinance to get cash out of their home. A cash out refinance will replace the existing mortgage with a larger one. The owner receives the difference in cash that they can use in different ways.

Some of the most common reasons homeowners choose to do a cash out refinance are as follows:

  • Home improvements
  • Debt consolidation
  • Pay for education expenses
  • Pay for medical bills or a family member’s assisted living

Get Rid of Your Mortgage Insurance

Many people buy their home using a loan program that requires that they pay mortgage insurance as part of their total monthly payment. Mortgage insurance is an insurance policy that covers the lender for potential losses if the homeowner defaults on the mortgage. Mortgage insurance reduces the lender’s risk with low down payment loans. If mortgage insurance wasn’t available, it would be difficult to buy a home with less than 20% down.

A lender isn’t required to remove the mortgage insurance until the balance of the mortgage drops to 78% of the value of the home. Most lenders will use the original purchase price to determine the value. Some loan programs – like FHA – require that the homeowner pay mortgage insurance for the life of the loan.

If your home has increased in value and a new appraisal will demonstrate that your loan balance is at or below 80% of the value of the home, it might make sense to refinance. If you have a conventional loan, you may be able to remove your mortgage insurance without having to refinance. It is a good practice to check and see.

Many homeowners who refinance experience significant monthly savings when they obtain a lower rate and remove their mortgage insurance.

Reduce Your Loan Term

If you can afford to make higher monthly payments, you may consider refinancing to a new mortgage with a lower term. A traditional mortgage has a 30-year term. But, shorter term mortgages are available. The most common terms are 15 and 30, but any term between 10 and 30 years is available.

It needs to make sense for you to refinance to a lower term. If the interest rate of the new mortgage isn’t lower, then most likely you can simply make higher monthly payments and prepay your existing loan.

If you find that it does make sense to refinance to a lower term, the benefits are significant. You will own your home free and clear much sooner, you’ll have the piece of mind of knowing you don’t have to make monthly mortgage payments anymore and you’ll save tens of thousands of dollars in interest over the life of the loan.

Convert from an ARM to a Fixed Rate

An ARM is an adjustable rate mortgage. It is typical for an ARM to be fixed for a set amount of years at the beginning of the loan and then start to adjust once the fixed period is over. If your loan is currently adjustable and you plan to be in the home for a long-term and you don’t want the risk of your interest rate increasing, then it probably makes sense to refinance to a fixed rate.

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