The decision to refinance can end up costing you thousands in closing costs and other fees. If you time the rate and term refinance process right, however, you can actually end up improving your financial situation, despite these costs. When you refinance your home loan, your lender generates a brand new agreement, which pays off the balance of your current loan. The new mortgage agreement comes with updated terms, interest rates and payoff dates. Tactical use of rate and term refinancing allows you to improve your potential return on investment without depleting your resources. Here are three beneficial times to choose this refinance option.
Upon Reaching 78% Loan To Value Ratio
If you purchased your home without putting 20% down, your monthly mortgage payment includes private mortgage insurance, or PMI, which can add thousands to the final cost of your home. The PMI funds do not apply to your principal balance or interest costs; it just protects the lender in case of loan default. You are only responsible for paying PMI until your principal balance hits 78%.
You can speed up the PMI removal by refinancing your home loan once you have built up some equity. You can work with a professional to secure an appraisal and determine if your home’s current value has grown enough to eliminate PMI and secure you improved payment rates. If not, you may want to wait until your PMI payments drop off after the 78% mark. For government backed loans, however, you have no choice but to refinance with a different lender to eliminate PMI costs.
At The End Of Your Adjustable Rate Mortgage Term
An adjustable rate loan allows you to make reduced payments at first in anticipation of financial growth in the future. Upon reaching the end of the initial term limits, your monthly mortgage payment could jump hundreds of dollars. If your financial situation has not improved enough by that time, you could struggle to keep your loan payments current, especially when faced with property maintenance and repair costs.
If you refinance at the end of your adjustable rate mortgage term, you could obtain a fixed rate loan with financially viable payment amounts. With the fixed rate option, your payment terms remain static, which eliminates the risk of high recalculation amounts.
After Significant Credit And Income Improvements
If made great strides in your career advancement efforts, you may have experienced income and credit improvements since you first obtained your home loan. These improvements can help you secure better loan terms through a full refinance of your loan. You may qualify for reduced interest rates that drop your payoff amount significantly. As your total loan balance decreases, so do your monthly payments. As a result, you can start paying additional funds toward your principal balance to pay off your home loan even faster.
Choosing Between The Home Loan Refinance Options
Although rate and term refinancing can help improve your financial situation, the returns can take a long time to add up. You can predict the turnaround time by calculating your monthly and total savings, and then comparing them to the costs of the refinance. If you find yourself in a dire need for money right now, you can elect to apply for a cash out refinance instead. With the cash out refinance, you can use the funds to repair or renovate your home, pay down debt or finance other expenses. To determine the best refinance option for your situation, obtain an online quote and compare the results with your expectations. The quote will help you determine if you will benefit financially from the rate and term or cash out refinance options.