Are you a homeowner struggling with paying the monthly installments on your existing mortgage?
Have you come across someone suggesting the option of refinancing your mortgage but are unsure if it is good for you?
If you do not have a clear idea of the process or are uncertain of the benefits you will get, you may be in two minds about opting for refinancing. This article will try to solve your dilemma by shedding some light on refinancing and why you need to consider such an option. Let us first understand what refinancing is before diving into why you should think about refinancing.
Refinancing is, in simple terms, the process of taking a new home mortgage to pay off your existing mortgage. Even though it is a good option if you want a reduced interest rate or a facility that tops up your existing mortgage, these are not the only reasons why you should opt for refinancing. Let us explore all the reasons why you need to consider refinancing.
Five Key Reasons To Opt For Refinancing
Take a look at the reasons why you ought to give refinancing a try:
1. Low-interest payouts
One factor that influences most borrowers to refinance is a lower interest rate offered by a vendor. A lower interest rate will reduce monthly interest payments as well as your EMIs. Many home loans are subject to floating interest rates that change as per the movement of macro rates existing in the economy. However, there are some lenders who stick to the original rate despite a reduction in the market’s overall rate. In such a scenario, moving to a mortgage with a reduced interest rate will free up your cash for other purposes and make your daily living more comfortable.
2. Shorten your loan’s term
If the number of years on your current mortgage is a cause for worry, then refinancing to a shorter term can be the way out. However, if your current rate is high, your monthly payment on a shortened term will be the same, but the years of payment will reduce. Hence, even if you don’t get the benefit of a reduction in payment every month, your overall amount of interest paid will come down.
3. Do away with PMI or MIP
If the value of your home has increased, refinancing could help you eliminate paying Private Mortgage Insurance (PMI) on conventional loans or Mortgage Insurance Premiums (MIP) on FHA loans. Most commercial home mortgages require PMI until you reach 20% in equity, while MIP on FHA loans remains in effect for the life of the loan unless your down payment is cleared to a specific amount. So, under such circumstances, refinancing could be a better option.
4. Pay off high-interest debts
A cash-out refinance is an excellent way to tap into your home’s equity and reduce or pay off your high-interest debt. Whatever the debt you have to repay, be it your credit card balance or any other loan draining your savings, the funds from a cash-out refinance can save you a lot of dollars.
5. Switch from ARM to a Fixed Rate
Many people opt for an Adjustable Rate Mortgage (ARM) to get the benefit of a lower rate at the start, but the rate usually adjusts in the future and may increase. To avoid this, you can opt for the security of a fixed-rate mortgage since the monthly payment for principal and interest remains steady for the entire term.
In addition to these five key reasons to opt for refinancing, there are also some other reasons that may make a borrower consider refinancing, such as:
- If a borrower experiences a sudden change in their financial status, such as a drop in income, paying the monthly installments can become a financial worry. In such a situation, switching to a new loan offering a longer tenure can ease the burden.
- Likewise, if a borrower’s financial situation improves suddenly, he or she may opt for a reduced tenure even if it increases the monthly EMIs, as it will help him settle the loan earlier.
- If a borrower experiences poor customer service at the hands of a vendor, he may consider refinancing. This may happen if the lender fails to adjust the rates of interest in accordance with the market movements or if the lender fails to issue timely loan statements.
Savings To Expect From Refinancing
What you save through refinancing depends on many factors, including closing costs. For example, if you refinance to a $300,000 loan and your closing costs are 2 percent of that, you would have to pay $6000 on closing.
Remember that you will start receiving the benefits of refinancing when you reach the break-even point when what you save exceeds what you spend on closing costs. One way to find your refinance’s break-even point is by dividing your closing costs by the amount you save each month with your new payment. For example, let us say you save $100 per month, and the closing costs on your new mortgage are $3000.
$3000 / $100 = 30 months.
This means if you close your new loan now, you will break even 2 years and six months from now. Remember that if you plan to sell your house before your break-even point, your refinance may not be worth it.
As you can see, refinancing is not a one-size-fits-all solution but a personal decision based on your unique needs and financial situation. It can be a good option for you if it frees up money for you or decreases the overall cost of your loan.
At Bond Street Mortgage, we deliver cost-effective mortgage products that sync with your specific requirements. Our experts will evaluate your present financial status to determine if refinancing is the right decision for you. We will offer comprehensive guidance to make your refinancing journey as smooth as possible and help you achieve your financial goals.
Maximize your home’s potential with our refinancing options! Reach out to learn more!