Refinancing your home can have a lot of benefits, even in today’s market. Of course, you might not refinance to get a lower rate right now, but there are other reasons to consider refinancing.
In any market, there are pros and cons of refinancing. Here’s what you should consider when deciding if now is the right time to refinance.
Pros of Refinancing in Today’s Market
If you look at interest rates, your first thought is probably that refinancing doesn’t make sense. No one can save money, right?
Believe it or not, refinancing has many benefits, even if you can’t get a lower interest rate.
You can Eliminate PMI
Most homes appreciated at rapid rates over the last year. However, if you pay Private Mortgage Insurance and aren’t near the 80% point of your home’s original value, refinancing may help you eliminate it faster.
If your current loan balance is 80% or less of today’s market rates, refinancing into a conventional loan can eliminate PMI and save you money. The PMI savings will offset the higher rate.
Depending on how much the interest rate increased your payment, you might have extra money to pay toward the loan’s principal, paying your loan off faster too.
You can Shorten your Loan’s Term
If your current loan is a 30-year term, but you can afford a 15-year payment, consider shortening your loan’s term. Shorter terms usually get better interest rates, so you may get a lower rate than anticipated and pay your loan off faster.
A shorter term means you’ll own your loan faster and pay less interest over the life of the loan. Even if your interest rate increases, look at the big picture. How much interest will you pay over the loan term?
Chances are you’ll save a lot more money taking the shorter term and paying your loan off in 15 years versus 30 years.
You can do a Cash-In Refinance
If you have a large sum of money to invest in your home, you might consider a cash-in refinance.
As the name suggests, you pay down a large chunk of your loan balance and refinance the remaining amount. For example, if you currently owe $150,000 but have $50,000 to pay toward the loan, you can pay off the $50,000 and refinance the remaining $100,000.
Since the loan amount is much lower, you might be able to afford a much shorter term. So despite today’s higher interest rates, you’ll likely save a lot of money on interest and own your home much faster.
Cons of Refinancing in Today’s Market
In any market, there are downsides to refinancing. Understanding the disadvantages of refinancing in today’s market can help you decide if it’s right for you.
You’ll Pay Closing Costs
In addition to higher interest rates, you’ll pay closing costs on your new loan. Most lenders charge 3% – 5% of the loan amount. Since you’re not likely saving money on your rate, the closing costs increase the loan’s total cost.
To decide if it’s right for you, determine your goal for the loan and then decide if the closing costs make sense.
For example, if you can eliminate PMI by refinancing, but closing costs are $10,000, it might not make sense.
You Might Extend your Loan
If you take the same mortgage term you have now when you refinance, you add time to your loan. For example, let’s say you have a 30-year loan and have paid on it for seven years. You decide to refinance into another 30-year loan today. It will take you 37 years to pay off your mortgage.
You increased the time it took to pay off your loan, and you’ll pay seven more years of interest, increasing the loan’s total costs.
You Need Great Qualifying Factors to Get Decent Rates Today
Today’s mortgage rates are much higher than last year’s, so you need almost perfect credit and a low debt-to-income ratio to get an affordable interest rate.
If you’re only refinancing a small amount, the interest rate doesn’t make as much difference. However, if you’re refinancing a large mortgage over a 20 – 30 year term, you need every tenth of a point in interest rates that you can save.
It still might make sense to refinance today if you understand the full implication of the loan. Pay close attention to the closing costs and total interest charges. Ask the lender the loan’s total cost over its lifetime, not just today.
Focus on the big picture to decide if refinancing is right for you. Don’t pay attention to the rate itself, as it doesn’t tell you much. Instead, the loan’s total cost determines which option is best for you.