Reasons to refinance your home — there are many.
Maybe you want to lower your overall monthly expenses or just your monthly payment? Maybe you want access to the value of the home before it’s fully paid off?
Whatever the reason you might consider this financial move, refinancing your home can have unexpected effects on your financial well-being. For example, if you decide to go through the mortgage process again, there are closing fees that some people don’t take into account.
On the other hand, if you choose not to refinance your mortgage, you might be missing out on financial opportunities. Refinancing can lower your monthly payment or allow you to save more efficiently for your retirement.
Therefore, you should scrutinize your goals and methods before proceeding.
This article will give you an overview of the most popular reasons to refinance your home and give you a better idea if it’s the right choice for you.
1. Lower Monthly Mortgage Payments
Among the most popular reasons to refinance your home is a lower monthly mortgage payment. It is an obvious incentive for most homeowners.
The two most popular ways you can lower your monthly mortgage payment are:
- Apply for a lower interest rate to decrease the current mortgage interest payable over the life of the loan.
- Apply for a lower payment directly, and extend the loan term that you will have to pay off the mortgage.
Individually, these are known as rate and term refinance.
2. Lower Your Interest Rate
This first approach has obvious benefits. For example, a lower mortgage interest rate might mean you reduce interest payments and can pay your home off faster and save money.
This approach is more likely to work if your financial situation has improved since you first signed for your initial mortgage loan. Then, potentially, you could negotiate a lower interest rate on your new fixed-rate mortgage.
Two main factors will likely improve your chances of success:
- If your credit score has improved.
- If mortgage interest rates overall decrease due to market fluctuations.
Improve Your Credit Score for the Best Rate
With any type of mortgage loan, like a Federal Housing Administration (FHA) loan, a Veteran Affairs (VA) loan, or even when dealing with a conventional mortgage, one of the primary factors is your credit score.
When you apply for a mortgage initially, an application to refinance will check to see how high your score is and how much it has changed since the initial application.
A higher score generally means a less risky transaction for the mortgage lender. Conversely, a lower credit score can indicate the borrower has difficulty paying off their debts. Maybe some of them are high-interest debt, or maybe credit card debt, making a riskier transaction for the lender.
Credit bureaus (Equifax, TransUnion, and Experian) generally use complex rules to calculate your score. FICO credit scores, on the other hand, calculate your score the following way:
- 35% reflects your payment history
- 30% reflects your credit utilization (it’s better to use only 20% max of your available credit, whenever possible)
- 15% reflects the length of your credit history
- 10% reflects new credit accounts (open a new account only when necessary)
- And the final 10% reflects your credit mix (if you have a variety of loan types)
You may not be able to cover all the bases listed here to improve your credit score, but this gives an idea of where you can concentrate your efforts.
Don’t Forget Closing Costs
Of course, when you do your calculation for refinancing, don’t forget to factor in your closing costs.
Any outlay you plan should include charges for loan origination fees, title insurance, taxes, an appraisal, transfer fees, and some others.
These refinancing costs average between 3-6% of the loan’s principal. You might notice that these amounts are almost as significant as the closing costs of an initial mortgage.
Federal Housing Administration Loans
The FHA has its own criteria for refinancing one of its loans.
If you purchased a home using the FHA loans program, look into whether you might be qualified to refinance your FHA loan.
3. Change your loan term
Another approach to lowering monthly payments is to apply to extend the term of your loan, plain and simple. This path will lower your monthly payments because you’re taking longer to pay off the same amount owed.
A homeowner choosing to extend the amortization of the whole mortgage will also incur extra years of compound interest. However, depending on how the homeowner invests the difference, it might cost them more than the compound interest would.
Remember: investments are never guaranteed. Housing is one of the safer investments — but, of course, not a slam dunk.
Paying off your home has a much higher chance of return. Once it’s paid off, you can access that equity for retirement funds with a cash-out refinance, a reverse mortgage, or a home equity loan.
4. Invest In Retirement
This is one of the more underrated reasons to refinance your home.
By negotiating a lower monthly payment, it may allow you to put more money into retirement savings or retirement investments.
Ideally, a younger homeowner would have more opportunity for these types of investment returns to overtake the amount they’d save by paying down the mortgage quicker. The further you are into your career, the less time you have to take advantage of compound investment interest.
If you choose not to refinance your mortgage and focus strictly on paying off your home, you may also lose the opportunity to max out retirement accounts available to you.
Despite the ups and downs of the stock market, it has maintained an overall steady growth for many decades. Stocks are never guaranteed, but they have great potential if you buy when prices are low.
Having all your money funneled into paying off your home will mean you will eventually have a mortgage-free advantage. But with that comes a much shorter time to invest those newfound savings.
Once you own your home, you still have to pay property taxes, homeowners insurance, maintenance, and other general housing expenses. Access to cash flow will still be a necessity for as long as you own your home.
5. Have the Option for a Cash-Out Refinance
If you need access to home equity in cash before the home is paid off, they can apply for a cash-out refinance.
This type of refinancing is a mortgage option where a new one replaces the old agreement with a greater amount owed. The difference is forwarded to the homeowner, giving them extra cash for other expenses, debts, or investments.
Whatever the reason for refinancing your home, keeping an eye on the market is a good idea — check when lending rates fall to new lows.
However, this can be a costly financial maneuver if you’re not careful. The most considerable risk inherent in this type of refinancing is if you can’t keep up with your payments, you may lose your home.
A cash-out refinance for your home can be a cheaper way to gain access to funds. The interest rate you pay on your mortgage may be much more competitive than other debt-consolidating options or credit loans available.
If you plan to apply the cash to pay off high-interest debt, like credit card debt, your credit rating might now be lower than when you originally applied for the mortgage. This low rating can negatively affect your chances for refinancing, cash-out or otherwise. But if you qualify, it may help you pay off high-interest debt more quickly, helping to raise your credit score.
How Does Cash-Out Refinance Work?
First, you need to find an equal housing lender that’s willing to work with you. That lender will assess the previous terms of your loan, the balance still owing, your equity, and your credit profile.
Next, the lender will do an appraisal and possibly make an offer based on an underwriter’s analysis. If you agree to the new terms, you’ll get a new loan that pays off the previous one and gives you cash for other expenses. After that, you’re locked into the new monthly payment plan for the foreseeable future.
You won’t see any cash in hand with standard refinancing plans — only a decrease in your monthly payments. However, with a cash-out refinance, the difference beyond the original mortgage payoff and the new amount is paid in cash, just like a personal loan.
How to Refinance with Specialty Mortgages?
The FHA and Department of Veterans Affairs (VA) loans qualify for special refinance options and have specific rules regarding refinancing.
The FHA has a handy comparison matrix to help simplify your choices. An FHA loan can also qualify for streamlined refinancing. However, the limit is $500 for cash-out on a streamlined FHA refinancing loan.
VA loans can frequently be refinanced with more favorable terms, including lower fees and interest rates when compared to non-VA loans.
For further information about cash-out refinancing rules, you can look at our handy guide.
6. Get Rid of Mortgage Insurance
Homeowners frequently carry Private Mortgage Insurance (PMI).
This added cost is due to making a less-than 20% down payment on their original conventional loan. Mortgage insurance is also required on FHA and USDA loans but not on VA loans.
So if you’re carrying PMI, you’re likely aware of how much it’s costing you every month.
But once you have 20% equity paid into your home, you can apply to your lender to cancel PMI. This offer generally applies to borrowers who:
- Have a conventional home loan
- Have a good payment history
- Are current on their mortgage (payments are up to date)
- Haven’t got any liens on their home
- Haven’t lost any value on their home
Once you reach 22% equity, the lender is required to cancel it so long as you’re current.
Is It Possible To Cancel PMI Sooner?
Yes, it’s also possible to get rid of PMI sooner through refinancing or if there is a spike in property values in your area.
Canceling PMI By Refinancing
If you want to cancel your PMI through refinancing, it’s better to bundle your benefits.
What that means: Canceling PMI alone by refinancing might end up being costlier than if you did nothing. Like we mentioned before, the closing costs for refinancing are similar to the original buying costs.
But, if you also negotiate for other benefits along with canceling PMI, like a better interest rate, you could reach a break-even period sooner.
The crucial part will be calculating how much you’ll pay to refinance your mortgage compared to what you will pay in PMI before it’s automatically canceled.
Canceling PMI Due To Value Increase
There is a way to cancel PMI before you are scheduled to reach 20%.
If the value of homes has increased in your market, your home equity may have reached 20% earlier than expected due to price appreciation. If this is the case, you may be able to cancel PMI without refinancing.
Of course, there will be a cost associated with purchasing a new home appraisal. But this is much easier and cheaper than the process of refinancing.
A home appraisal will usually cost between $350-$450, and will only take about half an hour to an hour on average to complete.
A Bonus To Value Increases Through FHA
If your present mortgage is insured by the FHA and home prices have risen in your area, you might have an opportunity to save money.
If the rise in market prices has increased the equity in your home to 20%, you can apply to refinance your mortgage with a conventional loan and save on the cost of FHA’s Mortgage Insurance Premiums (MIP).
Insurance through an FHA loan is for the loan’s lifetime, not just until it reaches 22% as with conventional loans.
10 Other Reasons To Refinance Your Home
While the above sections may be some of the more popular reasons to refinance your home, they’re not the only ones. We’ve put together some additional reasons for you to consider in case they match your situation.
- Your borrower profile has improved — If it has improved since you first applied for your existing loan, you might be qualified for a much lower interest rate.
- To change your home loan product — You might not have been pleased with your original product, but it was the only one you could afford at the time.
- Reducing the loan term — Some people may want a shorter term to own their home sooner and take advantage of a lower interest rate.
- Switching to a fixed rate — A common reason to refinance. If you have an adjustable-rate mortgage (ARM) and believe mortgage rates will rise, many people suggest moving to a fixed-rate mortgage (FRM).
- Avoiding a hybrid ARM reset — If you’re nearing the end of your term on your hybrid ARM, you might switch to a fixed-rate loan to avoid a costly reset before it’s up.
- Move to an ARM — Some people want to go the other way. They want a break from higher interest rates sometimes associated with their FRM.
- Removing someone from the title — Perhaps you want to remove your parents from being co-signers? Or maybe remove a name from the title due to a divorce? A refinance might be the best way to do this.
- To apply a lump sum to decrease your LTV — Your Loan To Value ratio (LTV) could be lowered if you came into a large sum of money. This option would allow you to pay the home loan off sooner and perhaps lower your monthly payments.
- To consolidate multiple mortgages — If you have more than one mortgage and want to combine them into a single payment with a lower interest rate.
- To access a special program — Some special loan programs appear that you might want to take advantage of before they’re gone.
Reasons To Refinance Your Home – Conclusion
While there are many reasons to refinance your home, it undoubtedly requires attention to detail and expert advice.
A wrong move could mean the difference in thousands of dollars or more.
If you’re interested in refinancing your home, My Perfect Mortgage is ready to show you the information and choices available to you. We’ll connect you to the right resources to help you find your way to a better monthly payment plan.
Get started with My Perfect Mortgage — it may be the best way to begin saving for your financial future.
Photo by RODNAE Productions from Pexels