Refinancing is something many homeowners have considered. Home refinancing may be done for any number of reasons, and the costs are often worthwhile if you plan to remain in the home for several more years. Here are ten reasons why people refinance their mortgages.
1. For a Lower Interest Rate
Getting a lower interest rate may be the most popular reason why people choose home refinancing. With a lower rate, borrowers can enjoy smaller payments, a shorter term, or possibly both. Divide total closing costs by how much you save per month to determine your “break even” point. If you plan to stay in the home longer than that break even time, refinancing is probably smart.
2. To Switch to a Fixed Interest Rate
When interest rates are low, switching from an adjustable to a fixed rate mortgage appeals to many homeowners. The predictability of a fixed payment is often worthwhile even if interest is slightly higher than with an adjustable rate loan. A fixed rate offers stability when other life expenses are unpredictable.
3. To Reset an Adjustable Rate Mortgage
For a fixed time period of three to ten years, the rate on an adjustable rate mortgage stays the same. Afterward, the rate resets, and may reset annually after that. When homeowners expect interest rates to go up, they may choose home refinancing before their adjustable rate mortgage resets. A fixed rate, or a different adjustable rate mortgage would offer more stability than a rate that could change annually.
4. To Withdraw Equity
People who have built up equity in their homes may refinance in order to “cash out” equity and use it for a major purchase, such as home repairs or remodeling. For those who don’t have cash on hand for major purchases, refinancing a home to cash out equity can be less costly than using credit cards.
5. To Consolidate Two Mortgages
Sometimes people have two mortgages, or a mortgage and a home equity line of credit. Having two payments may be needlessly complex for some, so they choose home refinancing to combine the two into a single mortgage. This could require purchasing mortgage insurance, but interest savings may be enough to more than offset those costs.
6. To Restructure Based on a Windfall
Suppose you come into a large sum of money. You can apply it to your mortgage principal, but you’ll still generally have the same monthly payment unless you can pay off the entire debt. Some people choose to pay down a significant chunk of their mortgage principal and refinance the rest, to enjoy smaller monthly mortgage payments.
7. To Eliminate Mortgage Insurance
Some loans don’t allow borrowers to drop mortgage insurance, even when they accumulate sufficient equity. In these cases, refinancing a home with another loan provider to avoid having to pay mortgage insurance may be worthwhile, because closing costs would be more than offset by mortgage insurance premiums.
8. To Add or Remove a Name from the Mortgage
If you get married, divorced, or otherwise find yourself in a situation where you need to change the names on a mortgage, refinancing is often necessary. This creates a new mortgage with the correct names on it. Refinancing may also be used to release a co-signer from a mortgage once a borrower’s financial situation has improved sufficiently.
9. To Access HARP before It Ends
The Home Affordable Refinancing Program (HARP) goes away at the end of 2016. For people who are “underwater” on mortgages (i.e. they owe more than the home is worth), and whose mortgages are owned by Fannie Mae or Freddie Mac, HARP offers refinancing that doesn’t require the equity other refinancing programs do. While HARP has been extended before, another extension is not a sure thing.
10. To Consolidate Revolving Debt
Interest rates on revolving debt like credit card debt are significantly higher than mortgage rates. Therefore, many people turn to home refinancing to cash out equity, pay off high-interest credit, and then owe money at a much lower interest rate in the form of a mortgage. Mortgage interest is also tax deductible while revolving credit interest is not. Refinancing a home, plus disciplined spending going forward can be financially smart.
Refinancing a home can be a wise financial decision and can save you tens of thousands of dollars over the lifetime of the loan. If you’d like to learn more about refinancing options, we encourage you to call 888-672-5626 or contact Northpointe Bank online at any time.