6 Advantages to Save Money from a Home Mortgage Refinance
Rates are still very low and refinancing is a popular way for some homeowners to save money. Some of the big benefits you can enjoy with a home mortgage refinance include:
Whether you should refinance can be a complicated question depending upon your mortgage situation. Six key advantages for many homeowners who refinance include:
#1 Refinance Your Home for a Lower Rate
Obviously, the biggest benefit of refinancing is reducing your rate. If you have been paying your mortgage on time for a number of years, you may well have increased your credit score. This is a good opportunity for you to take advantage of all that hard work and refinance into a lower rate that can save you hundreds of dollars monthly.
#2 Lower Debt Load
Many people are able to refinance their home so that they can pay down higher interest debt. After all, there are few types of credit accounts that have a lower interest rate than a mortgage at today's rates; some homeowners are able to refinance at less than 4%! This makes a lot of sense, especially if you are carrying debt with a much higher interest rate.
#3 Lowering Your Loan to Equity Ratio
The big plus of doing this is that you may not have to pay for private mortgage insurance. If the down payment that you paid when you purchased was less than 20% of the price, you probably had to buy private mortgage insurance or PMI. This usually costs .5% to 1% of the amount of your loan. For a house that costs $200,000, this could mean $2000 per year.
After you own your house for several years, you will probably be able to increase equity and change your loan to equity ratio. What it means: Refinance at a lower rate and pay no PMI!
Assume that you are saving a 1% PMI payment each year on a $200,000 home. That would allow you to put more than $150 per month into your mortgage payment and pay it off faster.
#4 Grace Period
When you refinance your mortgage, you most likely will have a grace period before you start your new payments. You may enjoy a month or more of no payment. So, it is a good idea to take advantage of that one or two months by socking the money away, or possibly paying down debt.
#5 Shorten the Term of the Loan
When interest rates drop, some homeowners take advantage by refinancing into a shorter term loan and not seeing much change in the monthly payment. For example, if you were to refinance a 30 year fixed mortgage of $100,000 into a 15 year loan, depending upon the interest rates, you could see only a small change in payment. This would be the case if you took out the mortgage when rates were higher, then the rates dropped one or two points later.
#6 Convert from Adjustable to Fixed and Vice Versa
Adjustable rate mortgages or ARMs offer lower rates than fixed mortgages at first. However, a periodic adjustment will occur and the rate could go higher. When this happens, you can save money by refinancing into a fixed rate mortgage. This offers you the benefit of enjoying a lower rate, and not having to worry about interest rate hikes later on.
Also, converting from a fixed mortgage into an ARM also can make sense for some homeowners. This is especially true when interest rates are falling. If they keep falling, the rate adjustments that occur could cause your rates to drop and make those mortgage payments smaller. This could prevent you from needing to refinance every time rates drop.
Converting to an ARM can make sense if you do not plan to stay in the house more than three years.
More Home Refinance Considerations
Refinancing often makes a lot of sense. There also are some considerations to think about when you refinance: