You might be wondering what mortgage refinancing is and how you can benefit from it. In this article, we’ll discuss the benefits of mortgage refinancing, including reduced interest rates, shorter loan terms, the ability to tap into the equity in your home, and the elimination of mortgage insurance. This article also includes a brief explanation of the process. You’ll also learn how to determine whether mortgage refinancing is right for you.
Reduced interest rate
The benefits of a reduced interest rate when mortgage refinancing outweigh the costs. While refinancing your mortgage with a lower interest rate will lower your monthly payment, you might end up paying more in the long run. Before you refinance, ask yourself whether you have enough savings to last at least three to six months. This amount is enough for an unexpected job loss, an unexpected home repair, or next year’s vacation.
A tenth of a percentage point difference in interest rates can save thousands of dollars over the life of a loan. For example, a 30-year fixed-rate mortgage at 5.5% will result in a principal and interest payment of $568 a month. A 4% interest rate on a similar mortgage would mean a principal and interest payment of $477 per month. A reduced interest rate when mortgage refinancing can save a homeowner thousands of dollars.
Shorter loan term
If you’re a homeowner who makes a steady income, you might be a good candidate for mortgage refinancing. The smaller bump in expense that comes with a shorter loan term may be more manageable than the higher payment. If you’re taking out a 30-year loan at 4.5%, for example, your monthly payments would be $506 in principal and interest. However, if you were aiming for a 15-year term, you’d pay $765 monthly, which is still manageable. But be aware that your debt-to-income ratio may have to go up as well.
One advantage of a shorter loan term is that it will help you build equity faster. This equity represents the difference between the mortgage and the value of your home. You can use this equity to finance home improvements, college tuition, or other expenses. By keeping the loan term shorter, you’ll accumulate more equity faster and enjoy lower monthly payments. However, you should be sure to have enough money on hand for unexpected emergencies.
Ability to tap into home equity
If you are considering a refinancing mortgage, you may be interested in obtaining a loan that will allow you to tap into your home’s equity. If you are considering this option, you will need to prepare detailed financial documentation, such as your pay stubs and tax returns. You will also need to know the terms of your refinancing and how much money you can expect to borrow.
The amount you can borrow depends on the amount of equity you have in your home. Equity is the current value of your home minus the outstanding balance on your mortgage. The amount of home equity you can borrow will depend on other factors, such as your credit score. Most lenders prefer that borrowers borrow no more than 80% of their equity. Unlike other loans, home equity loans are not available as drawable funds.
Getting rid of mortgage insurance
Getting rid of mortgage insurance with mortgage refinancing is possible. A conventional mortgage with less than 20% down is usually accompanied by private mortgage insurance, or PMI. PMI protects the mortgage company against losses if the home is lost or defaulted on. If you have equity in your home, you can request PMI cancellation in advance, if your loan balance reaches at least 20%.
There are several different ways to get rid of mortgage insurance, and you need to determine if removing PMI is an option for you. If you already have mortgage insurance, you will need to decide whether refinancing is right for you. You should consider the amount of mortgage insurance premiums you will be saving by getting rid of your mortgage insurance by refinancing. If you have at least 20% equity, prepaying your mortgage principal early will also get rid of your mortgage insurance.