Home refinancing is the practice of paying off a current home loan to replace it with a new loan. There are many reasons why homeowners do this, but the major one is to save money. However, only focusing on the short-term benefits of refinancing is one primary mistake homeowners make. This move can be costly in the long run. Therefore, it’s crucial that you know if refinancing is the right decision. Read on for five good reasons to refinance a home loan.
1. Cut off PMI (Private Mortgage Insurance).
If your PMI costs you a significant amount monthly, you can ask your lender to cut off the PMI’s service—provided there’s an excellent payment history on your side and your home hasn’t devalued. What’s more, it’ll help if you have up to 20% equity on a conventional mortgage.
If you’re trying to get out of the relationship with PMI before you reach 20% equity, it’ll be a costly move. Nevertheless, you can increase the value of your home by initiating home improvements. This can be a landscape improvement, upgrading your air conditioning, or kitchen and bathroom upgrades, etc. This way, you might be able to reach 20% equity and get rid of PMI. What’s more, you could set a higher asking price if you decide to sell.
2. Secure a lower interest rate.
If you want to refinance home loan to secure a lower interest rate, this is definitely a good reason. Most investment experts will tell you to jump at the opportunity if you can reduce your interest rate by at least 2.5%. However, a 1% reduction is enough of a push for many homeowners to pay off their current mortgage. A lower interest rate usually means a reduction in the mortgage interest you’re liable to pay. What’s more, securing a lower interest rate also makes it faster to build equity in your home.
3. Shorten the loan’s term.
Refinancing can shorten the life of the loan. This move is a good idea, as it has a long-term benefit. For example, refinancing from 9% to a lower rate of 5.5% for a 30-year mortgage on a house worth $100,000 can drop the loan term to 15 years. However, the monthly payment will increase slightly to $817 from $805.
For many owners, that’s a small price to pay to get your home loan cleared faster. For some homeowners, this may not sound like the best move, as it doesn’t put more money in their pocket or increase their ability to save or invest. However, an opportunity to quickly pay off may even be a greater investment, especially when you’re young.
4. Get out of an FHA loan.
Depending on how much your down payment was out of the loan amount, paying FHA (Federal Housing Administration) loan premiums can be a bummer. You can be stuck paying mortgage insurance premiums for a long time. Because you can’t just get your lender to cancel the FHA mortgage insurance, refinancing might be your best option to get out.
5. Convert to a Fixed-Rate Mortgage or an Adjustable-Rate Mortgage (ARMS).
Usually, the rates with an adjustable-rate mortgage are often lower than fixed-rate mortgages. However, when periodic adjustments come into play, ARM’s can increase at a great rate, unlike a fixed-rate mortgage. Converting to the latter makes better sense, as you’ll circumvent the worry of a future spike in interest rates.
On the other hand, switching to ARM, which may have a lower monthly payment from fixed-rate loans, can sound like a wise move, especially if interest rates drop. It even makes better sense if you’re not keen on staying in that house for too long. This way, you can reduce the interest rate on the loan and your monthly payment, thereby experiencing peace of mind when interest rises thirty years to come.