“When should I refinance my home?” is a very common question, quickly followed by “How do I refinance my home?” Luckily, the mortgage professionals at Partner Colorado Credit Union can help you determine answers to both.
What does refinancing mean?
Refinancing simply means you are paying off and replacing your existing mortgage. Typical reasons to do so include acquiring a better interest rate or term, consolidating your debt, or tapping into your home’s equity.
Why should I refinance my home?
For many borrowers, the opportunity to significantly lower their interest rate is the trigger to refinancing. Most experts believe it is worth the cost of refinancing if you can reduce your mortgage interest rate by 1%- 2%. Generally, you will see a significant drop in your monthly mortgage payments while building equity at a faster pace. Use a mortgage calculator to determine your savings at the new rate or term.
Another reason for refinancing your home is to convert an existing adjustable rate mortgage, (ARM), into a more traditional 30 or 15 year fixed-rate mortgage. The reason for this is ARMs expose you to potential rate increases once the fixed-rate portion of the term, typically the first three to five years, has passed. The opportunity to settle into a fixed-rate loan, especially if you plan to reside in your home for a long time, is one of the most popular reasons to refinance.
Refinancing to tap into the equity in your home remains a big motivation for refinancing as well. While it is tempting to get to the equity to remodel the kitchen, take an extended vacation or help pay for college tuition, be sure to do your math. Adding years to the term of the loan may not be as advantageous as a applying for a home equity line of credit or other type of loan.
When should I refinance?
Regardless of your reasons for refinancing, the associated fees are a key consideration before moving forward with the process. Appraisals, title insurance, processing fees, etc. will apply, similar to when you acquired your original mortgage. Determining if the cost of the loan is worth refinancing is a key decision.
In addition, you’ll need at least 20% equity in your home to avoid private mortgage insurance. The PMI fees alone could negate the benefits of refinancing to a lower rate. A program started in 2009 called HARP allows you to refinance a mortgage regardless of equity as long as you have a conventional mortgage owned by Fannie Mae or Freddie Mac and you’re current on payments. To determine if your loan is eligible under HARP, check the Know Your Options and Freddie Mac websites.
How to refinance a home
Much like acquiring your first mortgage, you’ll need to pull together paper work, document your financial resources and go through the application process. To make sure it makes financial sense for you, talk to a professional today.