Refinancing your mortgage can save you thousands of dollars in interest.
It can also reduce your monthly payments substantially.
You may be asking yourself when should i refinance my mortgage?
In this article we are going to help you understand the different types of refinancing options and go over some of the top signs that you’re ready to refinance your home loan.
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Types of Refinance Programs
There are refinancing programs for just about any situation from getting a lower rate, or monthly mortgage payment to using the equity in the home to get a second loan. Here are the different types of programs available.
Rate and Term Refinance – A traditional mortgage refinance that will lower your payment by reducing your interest rate and reseting the term of your loan.
Cash-out Refinance – Refinance your mortgage and get cash back for equity up to 80% LTV. One payment will need to be made with a 15 or 30 year fixed rate or adjustable rate mortgage term.
Home Equity Loans and HELOC – Home equity loans and home equity lines of credit (HELOC) use the built up equity you have in your home to give you a second loan. You can use the cash you receive for anything, usually it’s used to pay off debt or make repairs and renovations to the home. You will have a second mortgage payment lasting between 5 – 15 years.
Streamline Refinance – If you have a Government back home loan such as FHA, VA, 203k, or USDA you may qualify for a streamline refinance to lower you rate and monthly payment. Streamline means that these refinances are faster and require less paperwork. In fact they do not even require a credit check or income verification so you can refinance with bad credit.
13 signs you should refinance your mortgage
1. Your interest rate is higher than current mortgage rates
Interest rates have been at historic lows for a couple of years now. If you closed on your mortgage 7 or more years ago chances are that your interest rate is higher than the current rates. This is the number one reason you should refinance your mortgage, to lower the rate. Since home loans typically have a very large loan amount, the interest rate has a huge impact on the payments. A single percentage point can cost thousands of dollars a year in interest.
Speak to a lender to find out if you can get a lower rate by refinancing your mortgage loan. Read our article about how to get the best refinance rates possible.
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2. You want to lower your monthly payment
Lowering your monthly payment is something that a mortgage refinance can help you achieve. Not only by reducing your interest rate but by stretching the loan payments over a longer term.
If your loan amount is $200,000 and you have been paying on it for 10 years, the balance will be roughly $150,000. You can refinance that $150,000 for another 30 years giving you a much lower payment. This new lower loan amount amount stretched over a 30 year term along with a lower rate will significantly lower your monthly mortgage payment.
3. You want to get rid of PMI
If you have an FHA loan the mortgage insurance no longer will drop off at 78% LTV. And if you put less than 10% down on a FHA loan you will pay MIP for the life of the loan. The only way you can get rid of PMI is to refinance your mortgage into a conventional loan.
4. You want to make home improvements or repairs
Cash-out refinances, home equity loans, and HELOC loans allow homeowners to get a loan using the equity in your home. You can borrow up to 80% of the value of your home. For example: If your home is worth $300,000 and your loan balance is $200,000 you can borrow $40,000 dollars which will make the total loan amount between the 2 mortgages 80% of the homes value.
There are differences in these home renovation loans, cash-out refinance will require a single mortgage payment repaid over 15 or 30 years. HELOC and home equity loans act as a second mortgage and have a separate payment with a repayment term of 5 – 15 years.
5. You Are Close to Retirement
This one really depends on your individual situation. If you are close to retirement and you still have several years left on your mortgage. Refinancing into a lower rate and payment will allow you to more comfortably afford your mortgage payment each month on a reduced income.
If your home is paid off then you may want to consider a reverse mortgage. A reverse mortgage is where you receive monthly payments or a large up-front sum of money using your home’s equity. Reverse mortgages are not due until after death.
6. You have an adjustable rate mortgage
An adjustable rate mortgage has an initial term with a low fixed rate for a certain number of years. After the initial term the rate increases on an annual basis. Because of the increasing rate you would most likely save money by refinancing into a fixed rate mortgage.
7. You Have a 2nd Mortgage with a Variable Rate
If you have a first mortgage that is a fixed rate and a variable rate HELOC or home equity loan you may want to refinance. You could consolidate both loans into one loan with a single monthly payment. You might be able to convert the 2nd mortgage to a fixed rate and repay it with your normal mortgage payment over a 15 year or 30 year fixed rate term. If this option is available to you, you should consider refinancing your loan.
8. You have high interest debt to consolidate
If you have a large amount of debt with high interest such as credit cards and personal loans, you could refinance your mortgage into a lower rate home equity loan or cash-out refinance can save you thousands of dollars in interest. While it’s not always advisable to convert your unsecured debt into debt that is secured by your home. Because if some type of financial hardship occurs and you cannot afford to repay the loan your home in now in jeopardy of being foreclosed on.
9. You just want cash to spend
Maybe you don’t want to renovate your home and you don’t have any high interest debt to consolidate. Maybe you just want to take a vacation, buy a sports car, or go on a shopping spree. Using the equity in your home to convert it into cash is an option. I’m not your financial advisor so I won’t judge you for this. A cash-out refi or HELOC loan gives you cash for your equity. And it doesn’t matter what you spend it on.
If you’re going through a mid-life crisis you may be able to finally get that Ferrari you’ve been dreaming of for so long. Although we do not recommend using your home equity to buy a depreciating asset.
10. You have an FHA loan
FHA loans are a very popular type of home loan. They come with low credit score requirements and you only need 3.5% down. However, they are more expensive than a conventional loan because the mortgage insurance is higher. Your typical FHA mortgage has a MIP fee of 0.85%. Conventional PMI is usually around 0.55%.
Depending on the loan amount this difference could mean thousands of dollars in savings. If you are paying the higher FHA MIP fee you should refinance your mortgage into a conventional loan.
See if you qualify to refinance out of your FHA loan
11. Change your loan term
Refinancing into a different loan term can help you achieve whatever goal you’re seeking, whether its getting a lower monthly payment, or paying off your home sooner. If you have a 30-year fixed rate mortgage you may benefit from refinancing into a 10 year or 15 year mortgage. Your monthly payment will likely increase. However, interest rates on 15 year loans are as much as a full percentage point lower than 30 year mortgages. More of your payment will go towards the principle balance allowing you to pay off your mortgage faster. And save a ton of money in interest in the process.
If you need a lower payment, you can refinance into another 30-year mortgage, or go with a 40-year fixed-rate loan to get a lower mortgage payment.
12. Your credit score has increased recently
If you got your original mortgage at a time when your credit score was lower than it is today. Chances are the rate you received is much higher than what you will receive today with a much higher credit score. You will want to maximize your credit score before applying to refinance your home loan. Make sure you pay off your credit card balances. Having high credit card balances will significantly hurt your credit score.
Read our article on how to improve your credit score in 30 days for more credit tips
13. You have a Government backed loan with a high rate
If you have a Government back loan such as, FHA, VA, 203k, or USDA loan you can use a streamline refinance even if you have bad credit. In fact a streamline refinance not only doesn’t require a check check, they don’t verify income either. The only qualifier for this type of mortgage refinance is that you have a Government backed loan and a streamline refinance will be beneficially to you.
The Bottom Line
Refinancing your mortgage into a lower rate is often a very good idea. Refinancing isn’t free, there are closing costs associated with a mortgage refinance just like there is with a firs mortgage. Make sure that there is a net tangible benefit and you will be saving money even after factoring in the fees.
Are you ready to see if you can save money on your mortgage?
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