By now you know about the benefits of refinancing and how it can save you money. Savings alone is reason enough why there’s a need to refinance to take advantage of low rates while they last. Nevertheless, each homeowner has different needs. Unique circumstances have a hand as to why he/she wants to refinance. Why do you refinance?
As one expert asks, “What do you wish to accomplish when you refinance?” A cursory look at online news reveals that the answer to that question can be as varied as they can be practical, simple, and more.
To reduce the term of the loan
Refinancing a 30-year mortgage to a 15-year mortgage is seen as a money-saving move in the long run.
Why: Interest rates on a 15-year mortgage are typically lower than their 30-year loan equivalents. You also pay less interest because you’re halving the term it takes to pay down your mortgage, from making 360 payments to 180 payments. A 15-year loan also helps you build your equity faster. Just be prepared to make higher loan payments.
To get rid of mortgage insurance
Refinance is one of the best options to cancel or remove a private mortgage insurance (PMI).
Why: PMI is expensive. If you’ve accumulated at least 20% equity or paid down 80% of the home’s original value, you won’t be required to pay a mortgage insurance. Just take note of any seasoning requirement – usually a two-year period required by lenders before you can refinance to remove your PMI.
To remove a second mortgage or home equity line of credit
A second mortgage or a home equity loan can make things complicated when you refinance your first mortgage. Most often than not, the borrower and the second mortgage holder have to enter a resubordination agreement, which can be costly and complex.
Why: Eliminating a second mortgage, a high rate one at that, eases your finances. Under Home Affordable Modification Program (HAMP) with Second Lien Modification Program, second mortgages can be modified or eliminated.
To remove a co-signer (a parent or an ex-spouse)
When you refinance, you take out a new loan and sign new documents that can reflect the removal or addition of co-signers or co-borrowers.
Why: Unlike when you first took out the loan, you obviously can do away with your parents’ co-signing your mortgage debt. Also, after divorce, you practically cut ties with your spouse and your new mortgage is one document down.
To take cash out
Equity equals cash. This is an option afforded to homeowners who have chipped a larger portion of their mortgage principal.
Why: Cash that is taken out of refi can be used to consolidate debt, pay off higher interest credit cards, student loans or car loans. It can also be used to fund an overseas trip, a home improvement project or a university education.
Any of those reasons is good enough for as long as the benefits of refinancing would outweigh its costs going forward. Think it over, factoring your closing costs and the years you’re going to live in that house when you finally decide to refinance.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.
