Is It a Good Idea to Refinance My Mortgage?
- William Mingione
- Dec 7, 2022
- 2 min read
Refinancing your home means getting a new loan to replace your existing one. It's a way to reduce your interest rate and lower your monthly payments. It could be a good financial decision to refinance, but it could also be more costly in the long run. It all depends on how long you plan to stay in your home, current interest rates, and how long it will take to recoup the closing costs.
KEY TAKEAWAYS
If you can get a better deal on your loan by getting a lower interest rate, it might make sense to refinance.
If you refinance your home, ensure that you stay in the house long enough for the money you spend on the refinance to be paid back through the savings you get from it.
Refinancing your mortgage can be a great way to eliminate PMI (private mortgage insurance) and save money.
Reasons to Refinance
If interest rates have dropped, It can help you save money and shorten the loan term without changing your monthly payment. It implies that equity in your property might be built more quickly. If interest rates rise, converting from an adjustable-rate mortgage to a fixed-rate loan might be better. That way, your interest rate won't increase with periodic ARM adjustments.
Consider Closing Costs
When you refinance your mortgage, you will have to pay extra charges to cover title insurance, lawyer fees, an appraisal, taxes, and transfer fees. These costs can be as much as 6% of the loan’s principal, almost as much as you paid for the original mortgage. These costs can take a long time to make up for, but they can help you lower your monthly payments. Be careful of offers from lenders claiming to have “no closing cost.”
Consider How Long You Plan to Stay in Your Home
To figure out how much you'll save each month, you need to look at your current loan - how much you owe, the interest rate, and your monthly payments. Then compare that to what you could get if you refinance at the lower interest rate.
For instance, if you owe $200,000 on your loan at 6.5% interest, your monthly payments are likely around $1,257. If you refinance at 5.5% interest, your payments could drop to $1,130 - a savings of $127 each month or $1,524 yearly.
Consider Private Mortgage Insurance (PMI)
Refinancing your home can be tricky when home values go down. You'll have to pay upfront or get PMI, adding to monthly costs. Lower rates may not bring savings. If you have enough money, you own 20% or more of your home; you don't usually have to pay for something called PMI. However, if you get an FHA loan or the bank thinks you're a risky borrower, you will have to pay PMI. It might be worth refinancing your loan if you're paying PMI because you can save money by not having to pay it anymore.
Lakeview Mortgage Bankers can help you with your refinancing needs, especially in Long Island Refinancing. Contact us to learn more about our service.
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