With mortgage rates currently near record lows1, now is an advantageous time for many people to refinance their mortgages. A mortgage refinance involves replacing your current mortgage with a new loan, usually with a new interest rate, new monthly payment, new term (length) and other potential changes or benefits.
So why might you want to replace your current home loan with a new one? Here are some of the ways you may be able to benefit from a mortgage refinance.
Lower your monthly payments
One of the most popular reasons to refinance is to lower your monthly mortgage payment. One way to do this is by obtaining a lower interest rate if available. The more you can reduce your rate and the bigger your loan amount, the more you can potentially save. Refinancing into a longer loan can also lower your payments by spreading them out over more time.
Get out of an adjustable-rate mortgage (ARM)
If you currently have an adjustable-rate mortgage, there’s a risk that your rate and your monthly payments could increase after your loan’s fixed-rate intro period ends. To avoid this, you may wish to refinance into a fixed-rate mortgage while rates are low. This can provide you with the stability and peace of mind of a rate and a monthly payment that will stay the same as long as you have the loan.
Remove mortgage insurance
If you purchased your home with a down payment of less than 20% (or refinance with less than 20% equity), you were probably required to obtain mortgage insurance. This insurance often requires you to pay a monthly premium. Private mortgage insurance (PMI) on conventional (non-government) mortgages will disappear automatically once you build enough equity. However, mortgage insurance (MI) on government loans, such as the popular FHA loan, can only be removed by refinancing.
Since MI premiums can easily exceed $100/month, refinancing to remove them can be well worth it.
Get cash out to spend on anything
If you have enough equity in your home, you may be able to take equity out as cash via a cash-out refinance. This is done by replacing your current mortgage with a bigger one and providing you with the difference in cash. These funds can be used for anything, including home repairs and renovations, college tuition, emergency expenses and large purchases.
Draper and Kramer Mortgage can typically provide cash-out loans for up to 85% of a home’s value (conventional and FHA loans) or 100% of the value (VA or USDA loans) to qualified borrowers. For example, if you have a $300,000 home with a mortgage balance of $200,000, you may qualify for a $255,000 refinance loan (85% of $300,000) and receive $55,000 in cash.
Consolidate debt to save money
This is another way to use a cash-out refinance, but it deserves special mention. Taking out cash out of your home to pay off (i.e. consolidate) your other debts may save you money and simplify your finances. This is because mortgages typically have low interest rates, and other debt, especially credit card balances, often have higher rates. Even if your mortgage rate increases due to the refinance, if the average rate of your new debt decreases, your interest charges will still shrink.
Any of the benefits above could be significant on their own, but the potential to combine two or more of them can make your refinance even better. You may be able to get out of an adjustable-rate mortgage and consolidate debt. Or perhaps you can lower your rate, remove mortgage insurance and get cash out.
Because a mortgage refinance includes closing costs (typically about 2% to 5% of the loan amount), it’s important to make sure the benefits of your refinance outweigh the costs. However, with mortgage rates now near historic lows1, the refinance math is making sense for more people these days.
If you’d like to find out about your options for a refinance and see how the numbers add up for you, get in touch to schedule your free mortgage consultation.
1 Based on the 30-year fixed rate mortgage average as of November 21, 2019. Source: https://fred.stlouisfed.org/graph/?g=NUh