Should I Refinance My Mortgage?
Simply stated, refinancing involves replacing your current mortgage with a new one that offers different rates and terms. The desired outcome is often to have more manageable monthly payments or to pay less interest over the lifetime of the loan.
While reasons for refinancing vary, I typically find that homeowners only consider this when they see mortgage rates fall. And while lower rates are definitely something you want to look at, there are other times when refinancing can benefit you regardless of current rates.
Are You Paying MIP or PMI?
If you recently purchased your home with less than a 20-percent down payment you’re most likely paying extra fees in the form of a mortgage insurance premium or private mortgage insurance. While additional insurance may not initially sound like a negative, it’s important to note that the payments don’t cover you as the buyer. The money paid insures your lender for any potential losses if you default on your loan—and who wants to pay extra to cover someone else?
Here’s a quick breakdown of these costs:
- Mortgage Insurance Premium (MIP) is required if you have a mortgage backed by the Federal Housing Administration (FHA). The insurance premium must be paid for the lifetime of your loan.
- Private Mortgage Insurance (PMI) is required if you have a conforming loan and put down less than 20-percent. Unlike MIP, PMI can drop off your mortgage payment when you have 80-percent loan-to-value. Depending on the lender, PMI will be dropped automatically or you’ll have to request it be removed.
The good news is that you might be eligible for a mortgage refinance that would lower your monthly payment. Remember, PMI comes off once you have 20-percent equity in your home. But if you’re working with a lender who offers 90-percent financing with no PMI, you could refinance to eliminate both MIP and PMI payments once you have at least 10-percent equity in your home—reducing your monthly payment.
Are You Interested in Changing Your Loan Term?
A change in loan term can go either way—to reduce or extend the amount of time you have to pay your mortgage. For example, you could change your 30-year mortgage to a 15 or 20-year, or you could change a 15 or 20-year mortgage to a 30-year.
By reducing your term, you’d be able to pay off your mortgage faster and reduce the total amount of interest you’re charged. You would, however, have higher monthly payments for the remainder of your loan. While the actual increase would depend on the new term you choose, you’d need to consider your overall budget and potential future needs to determine if the added expense is manageable.
On the other hand, if you find yourself struggling to pay your current mortgage amount, extending your term might be an option to consider. Having additional time to repay your loan would reduce your monthly payment and provide some financial relief. The drawback to this is that you’d end up paying more in interest over time, so you really want to consider if a reduced payment is worth it.
Are You Looking to Consolidate Your Debt?
If you have a moderate to high amount of debt, you might want to consider consolidating it with your mortgage. This means that all your loan and credit balances would be wrapped into one.
The benefit to this would be that instead of having multiple regular payments with varying interest, you would have one monthly payment. And usually, the new payment and interest rate are lower than the combined total of what you currently pay.
However, similar to extending your loan term, debt consolidation using your mortgage results in paying more interest over time. You want to weigh-out whether or not the convenience and relief of having one lower payment per month is worth the cost of additional interest.
Another consideration is whether or not you have a plan in place to change your overall spending habits. If you’ve relied heavily on credit in the past, you want to make sure that you won’t again accumulate large amounts of debt after you refinance.
The decision to refinance is a personal one that depends on your current and future needs or goals. You want to make sure that you take the time to research all options and have a clear understanding of how much you’ll actually be saving.
Even if you feel refinancing isn’t an ideal option for you now, it may be in the future. I recommend setting up an annual consultation to review your current terms. A good rule to follow is when you change the batteries in your smoke detectors, it’s time to review your mortgage—including your home insurance and other related costs. A consultation is free, and it’s never a bad idea to stay on top of your home expenses and the potential ways that you can save.
About Cathy Verrilli
Cathy is a Senior Mortgage Specialist with over thirty-years of hands-on experience in the financial services industry. Building on her knack for finding the perfect pair of shoes for every occasion, Cathy has mastered the art of outfitting members with the financial solutions best suited for them. Outside of work she can be found spending time with her family, attending her grandson’s soccer games, or relaxing on the beach.