Looking at homeownership as an investment, there are several types of situations when refinancing might provide financial benefits to a homeowner. It’s important that homeowners have a clear idea of the possible outcomes when considering a refinance.
At Supreme Lending, Loan Officers are often contacted about the realm of mortgage refinancing. Here are a few of the most common reasons people typically refinance, some of which may apply to your situation.
Getting a More Favorable Mortgage Rate
Perhaps the single most common reason that homeowners refinance is to get a more favorable mortgage interest rate. This can be done by either securing a lower interest rate than your current mortgage or by switching from an adjustable-rate mortgage (ARM) to a fixed-rate loan. In both cases, this can lead to significant savings over the life of the loan and may even lower your monthly payments.
Be cautionary about looking to refinance the moment mortgage interest rates drop lower than what you're currently paying, because there are several additional considerations to be aware of, including the fees associated with refinancing as well as the amount of time you have left on your current loan. However, if mortgage rates have dropped significantly since you first secured your loan and you think you would benefit from a lower interest rate, refinancing may be right for you.
Changing the Terms of Your Loan
Another common reason people refinance is to change the terms of their loan. This may involve extending the length of the loan to lower monthly payments, or shortening the loan term to pay off the mortgage quicker. In the latter situation, refinancing to a shorter-term loan may increase your monthly mortgage payment, so it's important to consider what you can realistically afford before making this decision.
Switching Loan Type
Some homeowners choose to refinance from an ARM to a fixed-rate mortgage. Interest rates—and subsequently monthly mortgage payments—for an ARM can increase or decrease based on market conditions, so many people are more comfortable switching to a fixed-rate mortgage that has a steady interest rate and steady monthly payment. If you decide to stick with an ARM, you may be able to refinance your existing ARM by getting another one with terms that are more advantageous to you.
Removing a Co-Signer
If you required a co-signer in order to qualify for your mortgage, you may be able to remove them by refinancing. This is usually only possible if you've made significant progress in paying down the loan and have improved your credit score since first securing the mortgage.
Not only does this free up the co-signer from their financial obligation, but it may also help you qualify for a lower interest rate on your loan, especially if your credit score improves when the co-signer is removed. This can lead to more favorable loan terms.
Removing Private Mortgage Insurance or Mortgage Insurance Premium
For those who put down less than 20% down payment for a home, a common requirement is carrying private mortgage insurance or PMI. This protects the lender in case the borrower defaults on the loan, but it also means an additional monthly cost that can add up over time.
With Conventional mortgage programs, you don’t have to always refinance to remove PMI. It can be automatically removed after you've reached a certain equity threshold in the home—usually 20%. However, some mortgage programs, like FHA loans, require a Mortgage Insurance Premium (MIP) for the life of the loan. A FHA borrower would need to refinance to a Conventional mortgage product to remove the MIP cost.
Cashing Out Equity
Finally, another major way homeowners utilize refinancing is to cash out equity that's built up in the home. If you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment to be used as you wish. For example, you may use this cash for home improvements, debt consolidation, or for other large expenses. How you use the cash is up to you.
It's important to remember that cashing out equity will increase the amount you owe on your home and may also lead to a higher interest rate—factors that should not be overlooked.
As you can see, there are a variety of reasons why homeowners may choose to refinance their mortgage. It's important to carefully consider your individual circumstances and financial goals before making a decision, as refinancing may not be right for everyone.
For more on information on refinancing, or to learn more about any of our mortgage products and services, contact your local Supreme Lending team today.