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Homeowners who refinanced their mortgages in 2021 saved an average of $2,800 annually by refinancing.
Refinancing is the only way to get a new mortgage loan when you owe money on your house. It’s a process that requires some steps, work, and money, but it’s beneficial in many cases.
Is this something you’re thinking about doing? Why should you use this option, and when should you refinance your home?
These are great questions to ask if you’re considering a new loan. This guide can help you learn when refinancing is a good idea, so continue reading to find the answers you need.
You Can Get a Lower Interest Rate
One of the best refinancing tips you’ll ever learn is refinancing to get a lower interest rate. A loan’s interest rate tells you how much money the lender makes by issuing your loan. In other words, that’s the lender’s profit.
Lenders have some flexibility with interest rates, but they don’t have complete control over them. Instead, the economy controls the rates, specifically the Federal Open Market Committee (FOMC).
The FOMC adjusts interest rates to control inflation and other economic data and measures. As a result, interest rates fluctuate.
If you don’t know the rate you’re currently paying, look at your mortgage documents or the lender’s website. Then you can evaluate your rate compared to the current rates.
Refinancing to acquire a lower interest rate is one of the best reasons to refinance. It’s also the most popular reason people use this process.
Now, it’s important to keep in mind that refinancing requires underwriting approval. Therefore, you must meet the eligibility guidelines to qualify for the best rate.
If you can get a lower rate, you’ll save money. If you’re wondering how much you’ll save, a lender can help you determine this answer.
You Have an Adjustable-Rate Mortgage
Another time to consider home refinancing is when you have an adjustable-rate mortgage (ARM). An ARM is a loan that doesn’t offer a fixed rate. Instead, the rate changes at a specific point in time.
The rate might increase or decrease, depending on the economy. If your rate doesn’t change for another year or two, you might not want to risk it. After all, interest rates might significantly rise by that time.
If lenders are currently offering lower rates than you have on your mortgage, you might want to refinance now. You can choose a fixed-rate loan when refinancing to avoid rate changes in the future.
You can contact this mortgage lender to learn more about the current interest rates on fixed mortgages to determine if now is the right time to refinance.
You Can Eliminate PMI
You may want to seek some financial advice about your mortgage if you’re currently paying private mortgage insurance (PMI). PMI is an added expense you’ll pay until your loan-to-value (LTV) falls to 80% or less.
PMI is a requirement that lenders have with conventional loans when they lend more than 80% of a home’s value. The downside is that PMI doesn’t benefit you at all; it only benefits your lender.
The only positive thing about PMI is that it lets you get a loan without putting 20% down.
If you pay PMI with your existing loan, your current lender might not drop this requirement until the LTV is 78%, even though it’s only necessary for an LTV rate of 80%.
One successful way to eliminate it is through refinancing. There is one catch, though. Your home’s appraisal must be high enough.
If your home value has increased since you took the loan, you should have no trouble with this requirement. But again, you can talk to a lender to learn more about eliminating your PMI.
You Want to Pay Off Your Loan Sooner
Some homeowners choose to refinance their home loans to repay them sooner. If this is your goal, you’ll need to make sure you can get a lower interest rate. Otherwise, this isn’t a good reason to refinance.
Most people borrow money for 30 years when purchasing homes. After all, homes cost a lot of money, and it takes time to pay for them.
You may have had a lower income when you bought your house than you do now. If this is the case, you might be able to afford to pay more each month toward your mortgage balance.
Paying more each month is one way to pay off a loan sooner, but refinancing is another option. You can save money on the interest charges if you refinance, but you can also shorten the duration.
For example, assume you have 18 years left on your current loan. If you can afford the payments on a 10 or 15-year loan, you can cut three to eight years off your loan.
You Need Cash Out of the Equity
Another one of the top financial tips to consider with refinancing is your home’s equity. The equity is the amount of your home that you own, and you can calculate it by subtracting your loan balance from your home’s value.
You can borrow this money if you need cash for any reason. For example, some people tap into their equity to fund home remodeling projects, while others use the equity to pay off high-interest debts.
You can use a cash-out refinance to draw some of this money out of your home if you have enough equity. Refinancing, for this reason, is a great idea if you have a good use for the funds.
When Should You Refinance Your Home?
Reading through this guide might answer the question, “when should you refinance your home?” As you read through the common reasons people refinance, you might discover that refinancing is an excellent option.
If so, you can learn more about the process by contacting a mortgage lender.
Did you enjoy reading this blog? If so, you can find more mortgage-related articles on the rest of our site.