My wife and I are about to enter the mortgage refinance market because we want to get rid of our private mortgage insurance (PMI). What gives us confidence in entering this market is the rate of growth in our equity, due to how much pay down monthly and the increase in market value of our home. However, just because you have over 20% equity in your home and your goal is to get rid of that PMI, it doesn’t necessarily mean that it’s the right time.
There are many factors to consider, but one of the most important ones is to know the current interest rates in the market and how does it compare to the interest rate you have for your mortgage. Below are 5 reasons to refinance, some questions you should ask before jumping into the process, and something else you should be aware of.
Here are 5 reasons to refinance
1. Lower the monthly payment
The key to lowering your monthly payments are the interest rates and the PMI, if you have it. If lowering your monthly payment is your main goal, keep an eye on the market interest rates and the savings you’ll have from getting rid of your PMI.
2. Lower the interest rate
As of 8/15/17, 15 year fixed rates are 3.375% and 30 year fixed rate is 4%. So, if you financed your home when interest rates were significantly higher this would be a good time to refinance. If there is not a significant difference in your interest rate with current market rates and you’re just not sure, use an amortization calculator to compare side by side. How much will you really be saving if you refinance?
3. Switch to a fixed interest rate
If you’ve got an adjustable-rate mortgage (ARM), refinancing is the way to go to change your terms to a fixed interest rate. You’d want to make this change only if interest rates are low and you’ll benefit from the change. Don’t switch just for the sake of switching.
4. Shorten your loan terms
If you have a 30 year mortgage, refinancing to a 15 year fixed rate could be an option to consider. Just make sure you fully understand the difference between a 15 and a 30 year mortgage. Check out this recent post about this topic.
5. Remove PMI
Ah, the private mortgage insurance (PMI)! You got this PMI because your down payment was less than 20%, which is perfectly fine. I’ve got a PMI as well. However, once you’ve got more than 20% equity in the home, including the increased in market value, a refinance would be a great idea! You could save several hundred dollars a month by removing the PMI.
Here is another reason, but I’m not a fan…
Pulling cash from your equity during a refinance is an option many consider to make investments, such as starting a business, buying a second property, paying debt, etc. However, I’m not a fan of it because this is a high risk move depending on what you do with the cash.
Also, you’ve spent years paying down the mortgage so why pull all of that equity out and bring yourself to start all over again? If you ask me, I say don’t do it, but it’s an option.
Questions you need to ask yourself and your lender
Refinancing sounds great, but there are several questions you need to ask yourself before you make a decision:
- How much equity do I have in my home?
- Is my loan to value below 80%?
- How is my credit score?
- Do I qualify for a refinance?
- What are my current mortgage terms and what do I want to change?
- What is the end goal for the refinance?
Some of these questions may sound silly and pretty basic, but they cannot be overlooked. There could be unintended consequences if you make the wrong move and that is the last thing you want to experience. Be diligent.
Lets not forget…
Refinancing your home is not free. There will be closing costs and fees just like the day when you purchased your home. Also, depending on your mortgage terms, there may be some penalties for paying off your existing mortgage for the new refinanced one. Make sure you do your proper due diligence and don’t let yourself be caught off guard.
Ask your lender what are the closing costs and estimated fees? Will you have to pay any penalties with the existing mortgage lender?
The bottom line is that a refinance can be a life saver and extremely advantageous. However, it needs to be a well thought out plan and the timing needs to correlate with the interests rates in the market. Stay in tune with the interest rates so that you can time yourself right.