When refinancing your mortgage it means you are obtaining a new mortgage loan with new terms. The new mortgage loan will pay off your existing mortgage home loan. A few reasons why you might want to do a mortgage refinance.
- Lower Interest Rate
- Lower the Term (Years)
- Switch from FHA to Conventional
- Cashing Out
Lower your Interest Rate
One of the best reasons to refinance your mortgage is to lower your interest rate. By taking advantage of low interest rates you can save on your monthly payment and lower the amount of interest over the full term of the loan. Here is an example of a loan of $300,000:
- Interest rate of 4% the principal and interest payment = $1432
- Interest rate of 3% the principal and interest payment = $1,264
Lowering the Term
Most mortgage home loans don’t have a penalty for paying off your mortgage before the term is over. So the only time I would recommend to refinance to lower your years or term would be when the interest rates are low. A 15 year loan interest rate compared to a 30 year has a slightly better rate, so if you are comfortable with the payments then lowering the term down to 15 years might be a better option. Here is an example of a loan of $250,000:
- 30 years with 3% = $1,054
- 15 years with 2.5% = $987
FHA Loan to Conventional Loan
Another great time to refinance your loan would be when you have enough equity to switch over from a FHA loan to a Conventional loan and get rid of your private mortgage insurance. In an FHA Loan the mortgage insurance will remain for the life of the loan and for conventional it will fall off at 78-80% loan to value. Mortgage insurance can range from $250-$450 a month. A mortgage insurance has no benefit to the borrower, it only protects the lender incase you default on the loan.
Cashing Out
Cashing out from your home’s equity is great to consolidate your debt, remodel your home, invest in a business or putting it away incase of an emergency. Being able to leverage your home’s equity is one of the best benefits about being a homeowner.