From reducing the interest rate and payment, to pulling out cash, these are the top five reasons homeowners choose to refinance.
LOWER RATE & PAYMENT
The most common type of refinance is reducing the interest rate and payment. Dropping the rate one to two percent could mean the difference of hundreds of dollars in monthly savings.
When the home is worth more than the mortgage balance, it is called equity. When homeowner's have more than 20% equity in their home, they become eligible to pull cash-out (exception: veterans using a VA loan can pull up to 100% of home's value). There are various reasons to pull cash out. Consolidating debt, renovating the home, or re-investing the money elsewhere are a few.
The most common loan repayment term is thirty years. Those looking to pay off the home sooner will opt to refinance to a shorter term; typically twenty, fifteen, or ten. The lower the term, the higher the payment. However, a lower term means less interest paid over time.
REMOVE MORTGAGE INSURANCE
Homes purchased with less than 20% down are required to pay mortgage insurance (does not apply to VA loans). For conventional loans, it is called Private Mortgage Insurance (PMI). For FHA loans, it is called Mortgage Insurance Premium (MIP). The insurance covers the bank if the borrower defaults. Each one has it's own rules as to how long the mortgage insurance remains on the loan. However, the main rule is that mortgage insurance can be removed through a refinance if there is at least 20% equity.
ARM to Fixed Rate
An adjustable rate mortgage (ARM) typically starts with a fixed rate period and then will periodically after a determined date (called initial adjustment period). The rate could either adjust higher or lower depending on where the market is at that point. Homeowners who want to eliminate the uncertainty of their monthly payment, they opt to refinance into a fixed rate period.
If you are a homeowner and are looking to refinance, which would be the reason for you? If you need guidance on what refinance options you qualify for, please contact us today!