Refinance to Meet Your Goals
Should you refinance your mortgage? As of this writing, mortgage interest rates are at all time lows but refinancing isn’t necessarily a smart choice for every homeowner. Ask yourself what is my goal of refinancing? There are several possible answers to this question and five will be covered here:
1) Lower monthly payment 2) Cash-out / Consolidate debt 3) Pay off mortgage quicker 4) Eliminate private mortgage insurance 5) Switch from a variable rate to fixed
Lower monthly payment
Reducing your monthly expenses on a mortgage payment can be like giving yourself a raise and a great way to fight inflation. However this can be a short sighted goal and not the smartest choice if you’ve been paying on your current mortgage for 15 years or if you’re planning to retire in the near future.
If your goal is strictly a lower monthly payment regardless of cost or life of the loan, then refinancing could be the way to meet your financial goals.
Cash-out / Consolidate debt
Refinancing to cash out the equity in a home and use it to pay off a home equity loan, pool loan or student loan can be a great selling point for refinancing. You get a brand new loan with one payment that’s less than the other loans combined!
However, building equity in a home takes time and that equity can be a person’s most significant asset. Reducing the value of that asset to get cold, hard cash is not a wise decision.
Pay off mortgage quicker
Paying off your loan early by refinancing into a 15-year mortgage can help you own your home free and clear sooner, with a lower interest rate and significant interest savings. Your monthly payment may be more but you own your home free and clear sooner. Getting out from under the monthly commitment of a mortgage can be a major goal for soon to be retirees.
Eliminate private mortgage insurance
Private mortgage insurance or PMI is a type of mortgage insurance that protects the lender in case you default on your mortgage. This coverage is required for homebuyers who use a conventional mortgage with a down payment of less than 20 percent. But as you build up equity in your home you can refinance into a new loan without PMI.
Switch from a variable rate to fixed
It’s possible to use loan refinances to make the switch from variable interest rates to fixed interest rates in order to lock in low rates for the remaining life of the loan. A fixed rate loan offers protection from rising rate environments.
If you’ve decided that refinancing will help you meet your financial goals, you should also consider crunching the numbers using the following mortgage refinance calculators. Refinance calculators help you estimate the amount of money a home refinance could save you by comparing the details of your current home loan with new rates, terms and other factors.