The decision to refinance* your mortgage is a strategic move that can have a profound impact on your financial well-being. There are several types of situations when refinancing might provide specific benefits and unlock potential savings. It’s important that homeowners have a clear idea of the possible outcomes when considering a refinance. Let’s dive into a few of the most common reasons people may refinance, some of which may apply to your situation.
Getting a More Favorable Mortgage Rate
A key 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 may lead to significant savings over the life of the loan and may even reduce the monthly mortgage payments.
When mortgage interest rates drop lower than your current loan, it’s important to note that there are several additional considerations to be aware of, including fees and upfront costs associated with refinancing as well as the amount of time left on your current loan. Working with a trusted lender that provides personalized, transparent refinancing details and costs will help you make an informed decision for your mortgage needs.
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. Refinancing to a shorter-term loan may increase your monthly mortgage payment, so it’s important to consider your budget before making this decision.
Switching Loan Type
Some homeowners may refinance to opt for another loan type, for example moving 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 borrowers may be more comfortable switching to a fixed-rate mortgage that has a steady interest rate and monthly payment that won’t change.
Another scenario could be borrowers wanting to change from a government loan, such as FHA or VA, to a Conventional mortgage. This could be an effective way to save on some loan costs by removing required fees typically associated with government loans.
Removing a Co-Signer
If you required a co-signer to qualify for a mortgage, you may be able to remove them from the loan by refinancing after improving your eligibility to qualify for a loan by yourself. 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 could lead to more favorable loan terms. Homeowners may also want to remove a co-signer in the event of a divorce resulting in one spouse assuming sole ownership of the home and full responsibility for the mortgage.
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 mortgages, you don’t have to always refinance to remove PMI. It can be 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. An FHA borrower would need to refinance to a Conventional mortgage to remove the MIP cost.
Cashing Out Equity
Finally, another popular way homeowners utilize refinancing is to cash out the equity that’s built up in the home. If you refinance 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 to fund home improvements, pay off high-interest debts, 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 information on reasons to refinance, or to learn more about any of our mortgage programs and services, reach out to your local Supreme Lending team or contact us today.
*By refinancing an existing loan, total finance charges may be higher over the life of the loan.