Securing a home loan for your first property may have seem like a major challenge. Down payments, interest rates and other information were unfamiliar at the time. Now that you’re an experienced homeowner, you may want to dip your toes back into the lending stream. It’s possible to lower your monthly mortgage with a refinancing process. When the time is right, learn how and why you should refinance your mortgage to save hundreds of dollars in just one year.
Low Interest Rates
A common reason to refinance your mortgage is simply lower interest rates. You may have been locked into a rate that was two or three points higher than today’s average. According to the U.S. Department of Housing and Urban Development, you can streamline some loans so that the process is faster than a standard refinance. Working with a new lender might take several weeks to complete the transaction. However, the wait is worth it because several hundred dollars can be taken off of your monthly payment when a lower interest rate is chosen.
Taking Cash Out
For many homeowners, your property has a higher value than the current loan amount. You have equity that can be used as cash, but you’ll need to refinance in order to take these funds out. These refinance options are normally referred to as cash-out refinancing, according to the Federal Reserve. You agree to a higher loan amount, cover the cost of the home’s balance and deposit the extra cash in your checking account. Ideally, use these funds to improve the home so that they’re contributing to the future equity in the property.
Better Credit History
Many homebuyers end up in a crunch as escrow closes by having a less than stellar credit score. They agree to a higher interest rate as a result. When credit histories improve, it’s time to shop around for a new rate. Apply with several lenders in order to see the range of values. If the rate is one or two points lower than your current interest, it’s normally worth the effort to refinance. In some cases, you may want to wait a few more months for another uptick on your credit score and possible interest-rate decreases. Timing is everything during a refinance project.
Time to Change the Terms
In the past, you could opt for a 30- or 40-year loan term to spread out the costs. The 30-year term still exists today along with the 15- and 20-year options. If you have a term length that’s less than appealing, refinancing to a better one is a smart move. Extra cash in the bank each month may mean that a 15-year loan is better than the 30-year type, for example. You can save thousands of dollars on interest by switching to a shorter term length.
Get Rid of Mortgage Insurance
If you bought your home with a stipulation that mortgage insurance was necessary, refinancing to remove this clause is preferable. This insurance is mainly protection for the lender when you have a small, down payment. It can add up in costs throughout the years. Refinance at any term length, and the insurance clause will be instantly removed in most cases.
Refinancing a home loan is never without some costs. Closing fees, appraisals and other charges can add up to thousands of dollars that are tacked onto the final loan amount. Use an online calculator to see if refinancing at this point is smart for your household. Families who want to live at the property for several more decades will see the value in a refinancing with standard fees. Moving in the next few years, however, means you want to avoid charges that reduce your equity in any way.
You’ll receive refinancing documents that are very similar to your initial paperwork during the home purchase. Although lenders will explain all of the details within the documents, be sure to read the fine print. Mistakes can occur during any transaction. Papers can be rewritten and resubmitted as necessary. In the end, you should have a refinanced loan that reflects your negotiations with the lender. The transaction will ultimately help your financial situation.