As a homeowner, you may have heard your friends or financial experts on TV talk about home refinancing. You may even be wondering if it's something you should consider. Generally, when you refinance your home, you are swapping your old mortgage for a new one. Here are some reasons to consider home refinancing.
To Reduce Your Monthly Payments
If the interest rates have dropped since you took your original home mortgage loan, you may benefit from a new loan with a reduced rate. This reduces your monthly payments and the cost of your loan over time.
Again, if your income has decreased or you anticipate a future decrease, you may consider home refinancing to extend your loan term. For example, you can change your 15-year fixed-rate mortgage to a 30-year fixed-rate mortgage, as this will lower your monthly payments.
To Switch Mortgage Types
An adjustable-rate mortgage (ARM) can be expensive if the interest rate is adjusting upwards. As a result, you may consider switching to a fixed-rate mortgage to enjoy a locked-in interest rate for the rest of a loan. If you have a fixed monthly budget, this will also come in handy as your monthly payments will remain consistent.
Sometimes, it's a good idea to switch from a fixed-rate mortgage to an ARM. For example, if you plan to move before the loan ends, adjusting rates may help clear the loan faster.
To Eliminate Mortgage Insurance
You could be paying private mortgage insurance (PMI) if the down payment for your mortgage was less than 20%. Luckily, you can eliminate it if your home's value has risen to at least 20% equity or you have paid down the mortgage to 80% of your home's original appraised value. By refinancing into a conventional mortgage, you get to remove the PMI and save money.
Unfortunately, eliminating the PMI may not be possible if you're a new homeowner. Most loans come with a "seasoning requirement" requiring you to wait at least two years before refinancing to get rid of PMI.
Your Credit Score Has Increased
If your credit score has significantly risen, refinancing your home may help you get a better rate. For example, a certain rise in your credit score can save you interest worth thousands of dollars over the course of your loan.
To increase your credit score, you should adopt positive customer behaviors like paying your bills and debts on time. Also, consider checking your credit score regularly to know when you might leverage it for an improved loan.
For more information, reach out to a home mortgage loan provider.