Karen Behfar
Now that rates have dropped to around six percent, it might be a good time for those with higher interest rates to consider refinancing.
Your home is an investment, and one way to maximize that investment is through refinancing.
Refinancing your mortgage means replacing your current loan with a new one – typically with a new principal and a different interest rate. The new mortgage pays off the old one, leaving you with a single loan to manage.
Refinancing can offer several benefits, such as lowering your interest costs or allowing you to cash out some of your home equity. However, like anything, there are also downsides. Let’s briefly explore what refinancing is, along with its pros, cons, and key details.
Pros of Refinancing
Lower Interest Rates + Monthly Payments: This is one of the most common reasons for refinancing. If your credit score has improved or rates are lower due to market conditions, refinancing can save you money.
Eliminate Private Mortgage Insurance (PMI): PMI is required when you put down less than 20 percent on a conventional loan, adding hundreds to your monthly payments. If your home’s value has increased, refinancing could allow you to remove PMI by recalculating equity based on the new value.
Adjust Loan Features: You can save money by switching to a shorter loan term or lower your payments by extending the term.
Add or Remove a Co-Borrower: Refinancing allows flexibility in changing who is responsible for the loan.
Cash Out Home Equity: This is useful if you want to pay off high-interest debts. You can take out a larger loan and pocket the difference between your old and new mortgage amounts.
Cons of Refinancing
Closing Costs: Refinancing usually comes with closing costs ranging from 2% to 6% of the new loan amount, so it’s essential to compare offers from different lenders.
Impact on Credit Score: A refinance application triggers a hard credit inquiry, which may temporarily lower your credit score. This can remain on your report for two years.
Longer Loan Term or Higher Debt: Extending your loan term, even with lower monthly payments, can lead to paying more in interest over time. If you take a larger loan for cash-out, your debt-to-income ratio may increase, making future borrowing more difficult.
Ultimately, the decision to refinance depends on your potential savings. It’s crucial to identify which loan options you qualify for, and to understand the closing costs, interest rates, monthly payments, and repayment terms. Improving your credit score can help you secure the best deal, making refinancing not just an option, but a wise choice.