With interest rates the lowest they’ve been in a while, you may be thinking about refinancing your existing mortgage into a new one. As a homeowner, there are good reasons to consider this option: to get a lower interest rate, to drop private mortgage insurance, or to pull cash from your home’s equity to consolidate debt or make home improvements. The short answer, of course, is to have more money each month for groceries, car payments and the credit card bill.
Here are the five reasons:
- Lowering your rate. This is one of the most common reasons that our clients refinance their home. If interest rates are lower than your current homes rate, refinancing the balance on your loan at a lower rate can reduce your monthly payment and the overall cost of the loan.
- Convert your adjustable rate into a fixed rate. Adjustable rate mortgage (ARM) loans can help you ease into your payments, especially if you are a first-time buyer or if you need lower payments initially. If you plan on staying in your home for several years, however, you may want to consider refinancing to a long-term fixed rate loan. Doing so can help you rest easier at night, knowing that your rate and payment will not change for the life of the loan.
- Your financial situation has improved. If your credit score has gone up substantially from when you took out the loan or finances have improved otherwise, you may qualify for a better rate. For example, if you’ve been paying your bills on time and in full, your credit score has probably increased.
- Remove mortgage insurance. If you purchased your home with less than 20% down, you're most likely paying private mortgage insurance (PMI). Refinancing will help you eliminate the extra expense if you've paid down your mortgage balance to 80% of the home’s original appraised value and/or have seen an increase in your home's value to at least 20% equity.
- Take cash out to consolidate your debt or make home improvements. When you make your monthly mortgage payments, you're chipping away at your loans principle balance and creating equity. A cash-out refinance is when you tap into that equity and get cash back at closing to help pay for other things. By consolidating your debts, you can lower your total monthly expenses and keep more money in your pocket. Another thing to think about also is taking cash out and using it to remodel or update your home. By doing a little research, you can also make the right upgrades (bathroom, windows, landscaping) that will increase your home’s value and have you living in your dream home too!