You might be toying with the idea of refinancing your current mortgage. There are a lot of reasons someone might refinance; pay off bills, remodel the house, pay for college tuition, or simply change your mortgage terms. You have to decide is if it makes sense financially both now and for your future. Whatever the reason, you have to make that determination for yourself. Take a look at your current mortgage payment and interest rate. If you can lower your interest rate by one full percent, refinancing makes perfect sense, and you can either change your terms, cash out equity, or simply lower your payment.
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Change your terms.
Let’s say you signed up for a 30-year mortgage anywhere from 5 to 10 years ago. You can easily make the monthly mortgage payment but you’re wanting to pay off the home sooner now. You’d like to pay off the home sooner. Changing your terms down to a 10 year or a 15-year mortgage might be much more doable. If you can lower your interest rate your monthly mortgage payment may not change that much. We recently helped a couple who had about 20 years left on their 30-year mortgage. Their current mortgage payment was about $1800 a month. We refinanced down to a 15-year mortgage, saved them five years on their term and their mortgage payment, because of a lower interest rate, only went up $50 a month. Now, not only will they pay off the home five years sooner, but they have literally saved tens of thousands of dollars in interest.
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Cash Out.
Perhaps you want to cash in on some equity. Maybe you’ve been paying your mortgage payment for the last 10 years and your home’s value has increased. Maybe it’s time for a remodel, which will add even more value to your home. Maybe it’s time to pay off those high interest credit cards or maybe it’s time to send someone to college. You could pull out a lot of equity from your home and take care of some major financial issues.
Opt out of PMI.
Maybe it’s time to refinance to remove that pesky old PMI (Private mortgage insurance) that you had to obtain with an FHA loan? If the home has increased in value or you’ve paid the principle down enough to have less than 80% owed on the value of the home, you could refinance to a conventional loan and remove the extra PMI you’re paying each month.
Remember, refinancing is paying off the old loan and applying for a new one. Terms start over so you’ll have to decide if it makes financial sense. Plus there are closing costs, which can be rolled into the cost of the new loan or from your equity so there is usually not a lot of out of pocket costs. Appraisals are typically the only thing that must be paid up front.