Refinancing your mortgage is a two-edged sword. It can either get you closer to your financial goals or drown you further in debt. The former requires more finesse and knowledge about the ins and outs of mortgage refinancing, as you’ll learn in this article.
So when does it become the right choice? Read on to decide if you’re ready to get a refinance.
What Does a Mortgage Refinance Mean?
A mortgage refinance is the act of replacing your existing mortgage with a new one, preferably with terms more advantageous to your financial situation. A reduced interest rate is usually one of those terms. It can take a variable number of years for a loan to be paid off. It’s more uncommon to have a fixed rate rather than an adjustable rate, or vice versa.
It could also be a separate loan, such as a standard mortgage rather than a Federal Housing Administration (FHA) loan. In any instance, the idea is for your new mortgage to put you in a better financial situation than your old one.
What Mortgage Refinance Rate is Worth It?
While there’s a slew of opinions on this matter, the acceptable finance rate should be at least 1% lower than your current mortgage rate to make sense, but you’ll need to crunch the figures to see if a refinance is right for you.
Calculating the break-even point is one approach to achieve this. Because closing expenses and fees can add up quickly, you’ll want to be sure that the money you manage to save far outweighs the costs you’ll pay to refinance. You can determine how long it will take to recuperate the upfront costs by calculating the break-even point.
Mortgage Refinancing: When is it a Good Idea?
When people discover mortgage rates decreasing below their current loan rate, it’s a common trigger for them to consider refinancing. There are, nevertheless, additional compelling reasons to refinance:
You Want to Pay Off the Loan Quicker Under a Shorter Period
People who’ve recently gotten a higher salary or inheritance cash can opt to shorten the loan duration so they can pay less interest and own the house sooner.
You’ve Built Up Enough Home Equity and Want to Proceed Without Mortgage Insurance
Some government-backed lending schemes, such as FHA and USDA loans, may demand continued mortgage insurance payments even if the person has paid a significant amount of equity. Still, a conventional loan no longer requires PMI once the owner has at least 20% equity. Many FHA or USDA customers who improve their credit and income eventually switch to a conventional loan to avoid the high monthly mortgage insurance payments.
You Want to Cash Out Some of Your Home Equity
Homeowners can take equity out of their properties. The extracted equity can support a business, pay off other higher-interest obligations, or fund home upgrades cheaply. The interest payment may be tax deductible if the equity is used to pay for house repairs or extensive home upgrades.
If refinancing lowers your mortgage payment, shortens the duration of your loan, or helps you develop equity faster, it can be an intelligent financial decision. It can also be a valuable tool for getting debt under control if utilized correctly.
Cal Coast Funding is a mortgage lender at your service in San Diego. We pride ourselves on providing the most competitive rates and outstanding services. We’ll help you refinance your housing loan, apply for a conventional loan, to name a few. Get in touch with us today!