When Should I Refinance My Mortgage?

If the value of your home has increased, or if interest rates have dropped, you may want to consider refinancing your mortgage loan. There are many good reasons to consider refinancing; however, doing so is not always the best option for every homeowner. We’ll start by explaining what a refinance is and then exploring some good reasons to consider refinancing your mortgage:

 

What is Mortgage Refinancing?

Refinancing is the process of obtaining a new loan to pay off an existing mortgage. There are many good reasons to consider refinancing, but it’s important to review your current financial situation and fully understand your options as a homeowner.

The following information explores some of the different reasons that may lead you to refinance, along with the benefits and items to consider to help you decide how refinancing your current loan fits into your overall financial picture.

When Should I Refinance?

Refinance to lower your mortgage payment- Have interest rates decreased since your home purchase? While rates typically drop only marginally, even a change of a percentage point or two can often save you hundreds of dollars in mortgage payments over the life of a loan. If your income has declined or you are living on retirement income you may also find that a refinance allows you to continue to live in your home with a lower payment.

Refinance to change your home loan type- If you have an adjustable-rate mortgage (ARM), a balloon loan, or if your loan payment includes Private Mortgage Insurance (PMI), you may want to consider refinancing to a fixed-rate mortgage.

An ARM is a home loan in which the interest rate adjusts periodically based on market conditions. A balloon loan is a type of loan that has monthly payments that aren’t large enough to fully pay off the principal balance by the end of the mortgage term. A final “balloon” payment is necessary to pay the remaining balance, and this amount can often be markedly larger than the monthly payment. In comparison, the interest rate and amount of your monthly mortgage payment on a fixed-rate mortgage stay the same throughout the life of the loan, making budgeting more predictable for the homeowner.

Refinance to shorten the term of your mortgage loan- Another reason to refinance your mortgage is to shorten the period of time allotted to pay off the loan. For example, if interest rates have decreased while the value of your home has increased, you may be able to refinance your mortgage to a shorter loan term. By going from a 30-year-fixed loan to a 15-year-fixed loan, you’ll be able to pay off your mortgage loan sooner, while paying less interest at a lower interest rate.

Refinance to free up cash- The amount of equity in your home is the difference between the property’s value and the amount owed on any loans you secured to buy it. Equity is an asset that belongs to the homeowner. You can borrow against your home equity through a loan or a line of credit, which frees up funds to use for a variety of needs such as debt consolidation, home remodeling projects, and/or major purchases.

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Life Events that may Require a Refinance

There are many life events that cause financial situations to change, such as a change in income due to an illness, a family death, or the birth of a child. When financial changes happen, it’s important to discuss the changes with a trusted financial advisor to discuss ways to re-structure your debts to accommodate the changes in your financial needs. Some common financial changes that may be the catalyst for a refinance include:

Remove a Co-Signer- If someone co-signed on your loan when you bought your home to help you qualify, you will need to refinance in order to remove them from the loan. To release them from their obligation of liability (for instance, if they are looking to purchase their own home), a refinance will remove this co-signer from your loan, and as such, they will be released of liability for your mortgage.

Buying out a Co-borrower or Spouse- If you were married when you bought your home and decide to divorce, a refinance is required if the house is awarded to one of the partners by the divorce decree. This refinance will effectively remove the non-interested party from the loan and title. If your divorce decree requires you to buy-out your former partner’s interest in the property for a determined amount, known as an Owelty Lien, you can refinance to remove them from the mortgage loan and pay the Owelty Lien to buy-out their interest at closing.

Mortgage Refinancing Considerations

Refinancing your mortgage is one piece of a larger home loan puzzle that might not be the right fit for every homeowner. Before making the decision to refinance, consider these factors:

  • You may need to stay in your home for a certain number of years in order to realize the greatest potential savings of a mortgage.
  • Your current mortgage terms might include a prepayment Read your mortgage documents carefully.
  • Your income tax could be affected by a mortgage Consult your tax advisor about any possible tax implications.
  • You could be responsible for the payment of certain fees associated with refinancing your mortgage. These fees might include but are not limited to application, recording, title, mortgage tax settlement, tax services, and processing

Allow us to help you determine if refinancing your mortgage is a good option for you. To learn more about the advantages of Herring Bank Mortgage, home equity mortgage refinancing, loans and more, please contact us.

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