With interest rates at a record-low right now, let’s talk about the benefits of refinancing your home. What does it mean to refinance? Refinance means that your lender will change out the old loan for a new loan with a different interest rate and possibly different terms.
There are several reasons why you would refinance the mortgage loan on your home, such as:
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Lower Interest Rate
– Refinancing to a lower interest rate could lower your monthly payment and lower the total amount that you will pay for your home. For example:
Current Mortgage
Mortgage Amount : $325,000
Interest Rate : 7.2%
Mortgage Period : 30 Years
Total Cost of Mortgage : $794,182
Monthly Payment : $2,206
Refinancing to a 2.75% Interest Rate
Mortgage Amount : $325,000
Interest Rate : 2.75%
Mortgage Period : 30 Years
Total Cost of Mortgage : $477,642
Monthly Payment : $1,327
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Lower Interest Rate + Change in Mortgage period
– In our example above, you notice that the monthly payment went down significantly. If you refinanced to a lower interest rate and you want to continue to make similar monthly payments, then you could pay off your mortgage faster by changing the Mortgage period.
Current Mortgage
Mortgage Amount : $325,000
Interest Rate : 7.2%
Mortgage Period : 30 Years
Total Cost of Mortgage : $794,182
Monthly Payment : $2,206
Refinancing to a 2.75% Interest Rate + Mortgage Period Change
Mortgage Amount : $325,000
Interest Rate : 2.75%
Mortgage Period : 15 Years
Total Cost of Mortgage : $396,994
Monthly Payment : $2,206
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Eliminate PMI Costs
–Refinancing might enable you to eliminate PMI, or Private Mortgage Insurance, if your new mortgage balance is below 80 percent of the home value. The refinancing tactic works if your home has gained substantial value since the last time you got a mortgage. For example, if you bought your house four years ago with a 10 percent down payment, and the home’s value has risen 15 percent since then, you now owe less than 80 percent of what the home is worth. Under these circumstances, you can refinance into a new loan without having to pay for PMI.
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Cash-Out Refinance
– If you have lived in your home for a long time and paid down the balance, or have some equity in your home, you can refinance up to 80% of your home value for cash. For example, if the current balance on your mortgage is $150,000 but the value of your home is $225,000, you could borrow up to 80% ($180,000) and cash out the difference in what you owe, which would be $30,000.
Please note that it is not free money – it will increase the amount on your loan and have to pay back the lender.
It is a great idea to do a cash-out refinance for something that will increase the value of your home. Finishing a basement, adding a mother-in-law apartment, or updating cabinets and light fixtures are all things that can be done to increase the value in your home.
Because there are costs associated with refinancing, it may not make sense for everyone. Talk with your lender to see if a refinance will work for you.
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