The housing market is an ever-changing entity and what was the right loan program for you when you first purchased may not be the ideal scenario for you now. Interest rates fluctuate, home values rise and fall, personal circumstance such as income and credit score can change. You may decide to refinance in order to take cash out of your home or that different loan terms are more advantageous for your current needs.
Any and all those reasons can affect your decision to refinance your home loan.
What is Refinancing, You Ask?
Simply put, a mortgage refinance is paying off one home loan with a new home loan, which allows you to make adjustments to the rate and terms of your loan. For instance, changing an adjustable-rate mortgage (ARM) to a fixed- mortgage or modifying a 30-year term to a 15-year term. Other reasons to refinance are to get rid of mortgage insurance, and/or take cash out.
Mortgage rates are still near historic lows, and there are still many reasons a refinance might be right for your individual circumstances. Consult a refinance mortgage calculator to run the numbers on your refinancing mortgage rate options.
Reasons to Refinance
In the meantime, let's look at some reasons why you might consider refinancing:
1. Eliminate mortgage insurance. It is not at all uncommon for people in areas with fast-rising home values to get into their first home with a low down payment loan. The primary reason for this is you have the opportunity to start building equity immediately instead of waiting sometimes years to save for a 20% down payment. If you take advantage of loans that offer as low as 3% down, you can get in a home and the equity that accrues is yours.
Part of the tradeoff for this is paying mortgage insurance. Mortgage insurance (MI) is usually .05% to .1% of the entire loan amount per year, so you may be paying about $1,000 for every $100,000 of your loan annually. In most cases, you need to refinance to get rid of your MI. With an FHA loan, it is required. If your home values have risen to the point where you think you might have 20% equity or more, speak with a New American Funding Loan Officer to learn about your options.
2. Take cash out. If you've been in your house a few years while home values were rising, you have likely accrued some equity. Now may be the time to consider taking cash out for any reason. Home improvements are one of the most popular reasons for doing a cash out refinance. Build your dream backyard or remodel your kitchen. One advantage to putting money back into your home is that the renovations may raise its value to offset the equity you accessed.
3. Change your terms. The goals you had when you purchased your house may not be the same as they are now. Maybe then, you needed the monthly payment as affordable as possible, so you opted for an adjustable or 30-year loan. Now you've been promoted and you're looking at paying the property off quickly. Or perhaps it's the reverse? You've decided you need lower monthly payments for more financial freedom each month? Whichever applies, life priorities change, so it's always good to reevaluate your mortgage loan to understand your options at any given time. A New American Funding Loan Officer can evaluate your current loan and share other options that may be available.
4. Personal circumstances have changed. There are a lot of variables that go into determining your mortgage interest rate: your income, credit score, debt-to-income ratio, the home's loan-to-value ratio and the type of loan you have. What you qualified for when your first purchased may be different than what you qualify for now. Perhaps you've paid down your debt and raised your credit score? If that is the case, you may qualify for a lower interest rate than you did when you first bought your home.
There are costs involved in a refinance, such as the appraisal and closing costs, like there is in a home purchase. These fees are usually bundled into the loan, so you don't pay any cash out of pocket. To make sure your home appraises for the highest-possible value, take these important steps to prepare for an optimize your appraisal.
If you're curious about refinancing, an experienced New American Funding Loan Officer can assess your current loan and compare it with available programs to present you with possible options.