When you refinance a home loan you’re paying off the original mortgage balance and taking on a new one. It’s likely that the terms and interest rate on your new home loan will be different from the original mortgage terms – and often, this is the very reason some people refinance: to get a better mortgage rate. It’s usually easier to refinance than it may have been to secure the original loan, and you do bring any equity you’ve gained in the property into the equation.
While refinancing is usually financially beneficial (over the longer term) it does come at some initial cost. Just like the original loan, you’ll be responsible for closing costs, title insurance, and potentially legal fees. Depending on your situation and the property you’re refinancing, you might also be responsible for the cost of an appraisal, and any taxes and transfer fees. Also, it’s important to account for any prepayment penalty your original loan may carry. Not all mortgage loans carry this penalty and those that do often decrease the amount of the penalty for prepayment over an extended period of time, but it’s another cost to be aware of when considering refinancing your home loan.
With all of this in mind, it’s important to look at potential savings with a refinanced mortgage vs initial cost before assuming it’s a good fit for you at this time.
If you’re not sure and you want to discuss what it might look like for your specific situation, give me a call so we can crunch some numbers!
Five Reasons To Refinance a Home Loan
Lower Mortgage Payments
Mortgage rates naturally fluctuate and while they are currently low rates are expected to rise in the near future. Now may be the perfect time for you to lock in a lower mortgage rate for more affordable monthly payments than what you’re currently paying on your original mortgage.
Stop Paying for Mortgage Insurance
If you weren’t able to put 20% down when you secured your current mortgage you’re likely making private mortgage insurance payments as a result. The equity you’ve built since your purchase may be enough to cancel your PMI payments when you refinance a home loan.
Leverage Equity in Your Property
Home equity is one of your greatest assets as a property owner. Equity is the total of your outstanding loan balance(s) subtracted from the property’s current market value. Equity in a property can increase when the value of the home increases (for instance with additions, remodels, or cosmetic improvements, or when a neighborhood’s average home value increases) or the loan balance is paid down. You may be able to tap into your home’s equity to access the funds for home improvements or debt consolidation.
Decrease Interest Costs
Refinancing gives you the opportunity to change the loan terms on your 30-year fixed mortgage to lower amortization schedules and lessen the interest paid over the life of the loan. Generally, the rule of thumb has been that refinancing makes fiscal sense if you will reduce the interest rate on your mortgage by at least 2%. However, even a 1% savings is enough to justify refinancing in some cases.
To figure out if refinancing your home loan makes sense for your circumstances, get in touch so we can run the numbers.