Five Reasons to Refinance Your Mortgage

Many mortgage rates are at all-time lows.  Most home values are up.  Here are five reasons you might want to consider refinancing your current mortgage loan.

Obtain a Lower Interest Rate

One of the most popular reasons for refinancing a current mortgage is to take advantage of interest rates that are lower than when you took out your original loan.  This decrease in rates can come from an overall drop in the average interest rate or an increase in the borrower's credit. It is vital that when looking into refinancing at a lower interest rate, you take into account the closing costs and fees that will be associated with a refinance to make sure it is worth the switch.  According to Investopedia: "Many lenders say 1% savings is enough of an incentive to refinance.  Since refinancing can cost between 3% and 6% of a loan's principal and—as with an original mortgage—requires an appraisal, title search, and application fees, it's important for a homeowner to determine whether refinancing is a wise financial decision."  

Consolidate Debt

Unfortunately, debt such as credit cards and high-interest loans can result in a significant amount of interested paid during the repayment period. Many homeowners use their home to pay off this debt and repay the money at the lower mortgage interest rate. If you can, it will probably make sense to pay off high-cost debt by refinancing your mortgage, since the interest rate will undoubtedly be much lower.    

Eliminate Private Mortgage Insurance

If your home was originally purchased when you had a poorer credit score or a lower amount for a down payment than was needed for a traditional loan, you were likely placed with a loan that required private mortgage insurance. PMI results in a higher monthly payment for insurance to protect the bank in the event of a foreclosure, since either there was less equity behind the loan or it was considered higher-risk. Once you have achieved at least 20% equity in your home, you may be able to refinance to remove the PMI and obtain a lower monthly payment.

Change the Mortgage Term

When you first buy your home, you will often determine the term of your loan based on what you are approved for and how much you can afford for a monthly payment. As with anything in life, your situation can and often does change. You may find yourself wanting to refinance your mortgage to be able to shorten the term of your loan to pay less interest over time and get your house paid down earlier. Especially now that far fewer taxpayers are itemizing deductions, mortgage interest is no longer a deduction for many people. Consequently, it may make more sense to pay it off sooner. On the other hand, if you are having a harder time affording your current payment, you may consider refinancing to extend out the term of your mortgage and reduce your payment to make it a better fit with your current budget.

Cash Out Some Equity

Those with mortgages based upon home values from many years ago may be able to do a "cash-out" refinancing based upon the increased value of their home.  For example, according to Zillow, the median home value here in Bucks County PA of $356,000 is up 22% since 2012.  

Under the right circumstances, this may be a wise move,  However, avoid the temptation to use your home as a piggy bank. "It’s a place to live and not your personal ATM" warns Bankrate.com. "You’ll pay slightly higher interest rates for a cash-out refinance because you’re increasing the loan amount. Lenders generally limit the amount you can withdraw to no more than 80 percent of your home’s value to ensure you maintain an equity cushion."

According to J. Michael McMurdo, Owner and COO of Acadia Mortgage, "Pennsylvania residents need to bear in mind that all borrowers require title insurance, which is a major contributor to refinancing costs.  The insurance premiums are regulated by the state and are non-negotiable.”  On the other hand, "rates for refinancing are approximately 15% discounted below rates for purchasing."  

No matter the reason, refinancing your mortgage could be a good option for you. It is important to research and consider all the factors before making your final decision.