Should You Refinance Your Mortgage?
There are many reasons for refinancing a mortgage, and they overwhelmingly come down to money. Most people refinance to achieve one of these goals:
- Reduce the monthly mortgage payment
- Save on interest paid over the life of the mortgage
- Eliminate mortgage insurance from an FHA loan
However, there are many factors that go into determining the feasibility of any of these possibilities. There are closing costs associated with refinancing, including origination fee, appraisal fee, title insurance fee, and credit report fee. In total, borrowers can expect fees ranging from 2% to 6% of the loan’s value when refinancing, so it’s important to consider how long it will take to recoup these costs in savings. In addition, think about how long you anticipate living in your current home and if the timeframe allows you to come out financially ahead. All that said, here are some scenarios where you might consider refinancing:
Securing a Lower Interest Rate
When interest rates drop, borrowers rush to secure more favorable terms – this has the potential to reduce the monthly payment as well as interest paid over the life of the loan. A general rule of thumb is that if you can improve your rate by 1% or more, it may be worth refinancing. Consult a mortgage expert, who can help you decide if refinancing with a lower interest rate is wise.
Saving with Shorter Loan
Changing out a 30-year mortgage for a 15-year mortgage will increase the monthly payment, but it will also shave countless interest dollars off a loan. If you’re paying more interest than you’d like and can afford a higher payment, this is a viable possibility.
Getting a Loan without Insurance Fees
FHA loans can be useful but unless you put down a 10% down payment, they also come with mortgage insurance for the life of the loan. Every year, this mortgage insurance can cost around $1,000 for every $100,000 borrowed. Refinancing may make sense if you can eliminate FHA mortgage insurance and save money. However, if you don’t have at least 20% equity in your home, you’ll trade FHA mortgage insurance for private mortgage insurance (PMI), which might negate any benefits.
Switching from an Adjustable Rate Mortgage (ARM) to Fixed Rate
Because interest rates on Adjustable Rate Mortgages (ARMs) can change with market fluctuations, refinancing to a fixed rate mortgage could reap benefits. If this applies to you, compare current mortgage interest rates to your ARM and see what savings you could realize.
Sources:
https://www.investopedia.com/ask/answers/09/refinancing-mortgage.asp
https://www.forbes.com/advisor/mortgages/refinance/when-should-you-refinance-a-home/