Although low mortgage interest rates may be an incentive for many homeowners to restructure their finances, the choice to refinance your home is expected to be based on personal financial strength.
Home refinancing can be highly beneficial, as it tends to save you money on interest costs and gives you the option to cash out some of your home equity. It can be specifically beneficial if you have credit strong enough to qualify for awesome terms on a loan and your long-term savings will conveniently offset the up-front fees.
However, refinancing is not always worth it. This is because you could get a longer repayment term or a bigger loan and eventually pay more over time or go into higher debt. Some circumstances could make home refinancing a good option, while others may mean you should pause and reevaluate. This article is set to inform you about home refinancing and insurance.
Advantages of Refinancing Your Home
Possibly Low Interest Rate and Monthly Payment
One of the most popular reasons to refinance is to obtain a lower interest rate. This may result if you have improved credit since the first time you applied for a mortgage or if lenders are providing low rates as a result of market conditions.
Refinancing can result in huge savings, particularly if you also reduce your repayment timeline. You can also choose to refinance so as to go for a lower monthly payment by opting for a longer repayment term.
Possibility to Eliminate Private Mortgage Insurance
When you obtain a conventional home loan and surrender less than 20% of the value of the home, you will probably need to carry private mortgage insurance (PMI) to keep the lender from the risk associated with missing payments.
PMI can include hundreds of dollars to your monthly mortgage costs, but if your home’s value has increased and you have paid part of your loan balance, then you may hold a minimum of the 20% equity required to avoid PMI. This means you can refinance to a new loan, making use of the new value of your home to make the equity calculation, and eliminate PMI.
Disadvantages of Refinancing Your Home
Closing Costs
Refinancing your mortgage will be accompanied with closing costs of about 2% to 6% of the new loan price. Those fees include attorney fees, origination fees, appraisal fees, and more. You may be able to negotiate some fees down, while costs may differ, based on your lender.
Note that it is wise to compare offers from several refinance lenders, plus the one you currently have your mortgage with. This will help you get the most suitable terms.
Possible Negative Impact On Your Credit Score
When you apply for a refinance, the lender will carry out a hard credit inquiry so as to view your credit report before deciding whether to work with you or not. A hard inquiry will remain on your credit report for two years, and can result in a drop in your credit score that lasts for some months.
Your initial mortgage will also show as a closed account on your credit report as you refinance, which may lead to a reduction in your score. Note that you will neither be able to avoid this account closure nor the hard inquiry when you refinance. Meanwhile, your credit score will perhaps improve as you make early payments toward the new loan.
Possibility for a Longer Loan Term
When you refinance to a longer loan repayment period or you opt for a cash-out refinance, it is essential to balance the short-term benefits with the longer term impact. As a result of interest costs, you may eventually pay more over the life of your mortgage loan if you refinance to a longer-term loan, even if you have smaller monthly payments.
However, if you take out a larger loan as part of a cash-out refinance, your debt-to-income ratio will increase, thereby making repayment more complicated or making it harder to borrow more later on.
When You Should Refinance
You can refinance your home if:
You Have Good Credit
In a market with increasing interest rates, you will want to make sure you obtain the lowest possible rate and the savings most possible.
Having a good credit score is your best bet at making refinancing worthwhile. Moreover, if you have improved credit since you first purchased your home, then it is a solid reason to consider refinancing.
You Stand to Save Money
Compare your present interest rate with the refinance rate you are suitable for, including the new monthly payment you will receive. If your new rate is about 0.5% lower, refinancing will probably net you enough savings to make it beneficial. You will also need to save sufficient amounts, monthly and over time to break even on the closing costs within a considerable amount of time.
You Can Change Loan Attributes
Changing loan attributes will improve your financial health. Refinancing is a viable option when you want to change to a fixed interest rate, desist from paying PMI, or add or remove a fellow borrower.
Refinancing to a longer loan term will not result in considerable savings. Hence, if you can afford a shorter term, like a 15-year fixed-rate mortgage, then refinancing will help you to both save on interest overall and quickly pay off your mortgage.
When to Avoid Refinancing
Insignificant Interest Savings
You may find out that you do not qualify for an interest rate that is much less than what you have, or that your finances do not give room for you to choose a shorter repayment term. This could imply that after closing costs, refinancing will not make you save money over time.
Trouble With Monthly Payments
When there is financial hardship, refinancing to a low monthly payment may not solve the problem, since you may not be eligible for the most suitable loan terms. Rather, you can call your loan servicer and ask for a mortgage modification.
Rental Property Insurance
Rental property insurance, also referred to as landlord insurance, covers risks that concern renting your property, such as home, to others. It can give financial safety in a case where your property is damaged, or someone is injured on your property.
However, note that rental property insurance may not be necessary if you occasionally rent out your residence, such as when you rent your residence while you’re away for a vacation.
Meanwhile, if you rent out your property for a long period, like for many months or years, then you will likely need rental property insurance, as it will protect you from possible financial losses.