Many first time home buyers leverage themselves to the maximum credit available in order to purchase their dream home. The costs associated with refinancing has to be taken into consideration in order for it to be cost effective. The lender selected will consider your income and assets, credit score, other debts, the current value of the property, and the amount you want to borrow. If your credit score has improved, you may be able to get a loan at a lower rate.
Here are a few reasons why homeowners might consider refinancing.
1. Unlock the equity of the property
If the property value of the home you live in has appreciated, homeowners can unlock the equity. With today’s low interest rate environment, homeownership is desirable. If you have improved your home by updating, renovating or adding a new bathroom it adds to the value of your house. Recent sales in the area can help you determine if the value of your property has increased. Comparable sales of similar homes (same number of bedrooms, bathrooms, garages, as well as age of dwelling) within a few blocks of your existing home in the last 6 months can indicate whether or not your property has increased in value.
When you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment. This is called a cash-out refinancing.
2. Reduce the interest rate on an existing mortgage
Eliminate private mortgage insurance. If your original mortgage was more than 80 percent loan-to-value, it is likely that you are paying private mortgage insurance or PMI. The PMI was determined by size of the down payment made, your credit score and the premium charged by the insurer. PMI goes away when your loan-to-value decreases below 78 percent.
If you have a regular mortgage at a high interest rate, it could be the right time to refinance with the low rate environment. There are a number of different products which you can choose which will make payments more affordable.
If you jointly own a home and are divorcing your partner, refinancing is an opportunity to release one individual from the obligation.
4. Adjusting the length of your mortgage
With the low rate environment, there is an opportunity to pay down your mortgage at a faster pace. Refinancing into a 15-year term from a conventional 30-year mortgage will enable homeowners to build equity faster and eliminate mortgage debt in a shorter time frame.
5. Changing from an adjustable rate to a fixed rate
Refinancing from an adjustable rate mortgage or ARM to a fixed rate depends on how long you want to live in the property. Typically adjustable rates start low after an introductory period and adjust according to the type of mortgage it is. A one-year ARM will adjust up or down every twelve months. depending on the benchmark it is tied to. When there is volatility in the market, there is a greater opportunity for the rate to go swing. There are safety features attached the mortgage vehicle but payment can change up to two percent at each adjustment period. Knowing exactly what your monthly mortgage payment is each month can give you peace of mind.
Remember that, along with the potential benefits to refinancing, there are also costs.
When you refinance, you pay off your existing mortgage and create a new one. When refinancing, you may encounter many of the same procedures and the same types of costs the second time around.