Refinancing is many benefits, learn all about refinancing and see if it is right for you.
Refinancing your home mortgage can often times be beneficial to the homeowner but in some cases it doesn’t make financial sense. Before figuring out if refinancing is right for you, it’s important to understand the two types of refinances there are Rate and Term Refinancing and Cash Out Refinancing.
Rate and Term refinancing is used to save you money on your monthly payment by reducing your interest rate and/or changing the term (number of years for loan repayment).
The other type of refinance, a Cash Out refinance is taking out a new mortgage for more than you owed on your original mortgage, and taking the difference between the two in cash. You can also use a cash our refinance for home improvements or deferred maintenance.
5 Reasons to Refinance
- Save Money Overtime
Using a rate and term refinance, if current market interest rates are lower than what your interest rate is, you should consider refinancing. In your consideration, you must take into account how many years you plan on staying in the home to ensure the financial savings make up for closings costs and bank fees associated with refinancing.
Closing Costs: $3000*
Savings on Monthly Payment: $250
Break Even Point: 12 Months
In the example above, if you plan on moving at or before 16 months you would break even with the costs associated with refinancing so it probably isn’t in your best interest to refinance. (*Not actual closing costs. Costs will vary.)
- Reduce Your Monthly Mortgage Payment
For most Americans, their mortgage payment is the biggest bill they pay each month. At times, especially after the holidays cash flow can be tight. Currently, interest rates are low and are potentially lower than your current interest rate. Refinancing into a lower interest rate can save you money on your monthly payment, releasing some much needed cash for other financial obligations.
- Change the Type of Home Loan
Adjustable Rate Mortgages (ARMs) offer interest rates that are comparable with the current market. So when interest rates are low, your monthly mortgage payments are low. When the market changes and interest rates start climbing, so will your mortgage payments. Some homeowners are fine with the uncertainty and constant changing of their monthly payment because of the potential savings. However, if rising interest rates and the potential of an extremely high mortgage payment frighten you, refinancing into a fixed-rate home loan or fixed-rate mortgage might be right for you. In order to successfully refinance from an ARM to a fixed-rate loan, you’ll want to make sure your credit hasn’t fallen, that you don’t owe more on your mortgage than your home is worth, that your income will allow you to afford the higher monthly payments, and that you have enough cash to pay closing costs.
- Pay Down Debt
Using a cash-out refinance, you can take the existing equity in your home and use it to pay down debt. Cash out refinances can are a great option if you are looking to consolidate debt and get rid of multiple monthly payments for one lower monthly payment.
- Refinancing Your Specific Loan Type
Depending on your specific home loan, there are many other refinance options including:
- Refinancing FHA Mortgage Insurance: If you would like to eliminate the FHA mortgage insurance, you can refinance into a full conventional loan. However, if you do not have 20% equity you may refinance into an FHA no mortgage insurance payment option with a slightly higher interest rate.
- Refinancing an Interest Only Mortgage: Because Colorado home values have increased in most areas across the state, you could potentially refinance your interest only payment.
- FHA Streamline Refinance: This type of loan does not require an appraisal if you are not seeking cash out, just looking to reduce your interest rate.
- VA Streamline Refinance: In most cases, this type of refinance will not require an appraisal. If you are interested in obtaining cash out for debt consolidation or home improvements, the loan amount is limited to 100% of the appraised value to include the VA funding fee. If you are receiving VA disability pay, you are not required to pay a funding fee.
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