Reduce Monthly Home Expense by Refinancing
If you are looking to save money without moving or downsizing then refinancing your home might be the best option. You can refinance your mortgage and then use the freed-up cash to reduce your monthly home expense. Here is what you need to know-
It is important to understand that interest rates are a moving target. If your mortgage's interest rate is considerably higher than current levels, you should consider refinancing to lower your monthly payments. You can then pull out cash to make a major purchase, pay for some needed remodeling or use the extra cash to lower your housing costs.
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First you should ask yourself how long you are going to stay in your home. You can then divide the cost of refinancing by 12 to find out how many months you need to stay put for a refinance to be monetarily worthwhile to your situation. Financial experts advise that you need to stay put for at least three years and secure a rate that is at least 1 percent lower in order for refinancing to make sense. In addition if you currently have an adjustable rate mortgage, negative amortization or interest only loan that is due to reset or is not building equity than you should consider refinancing. Today's historically low mortgage interest rates make it a great time to refinance a home loan and lock-in low rates on a standard mortgage refinance loan with a fixed interest rate
Another cost saving benefit from a refinance can occur if you have at least 20 percent or more equity in your home. If you do you might benefit from refinancing by reducing or eliminating your PMI (Private Mortgage Insurance) in addition to better terms and rates. Private Mortgage Insurance is a type of insurance that was added to many loans that did not put down at least 20 percent down payment when purchasing the home. In exchange for less money down, the Private Mortgage Insurance provides additional insurance to lending banks in the event of a default. The elimination of the Private Mortgage Insurance in a home refinance can reduce monthly payments from $70 to $150 per month in addition to huge interest rate savings over the life of the loan.
If your debt to income ratio is nearing the maximum you may also actually improve your credit score by freeing up additional income and lowering the minimum monthly payment amounts of your basic bills including your housing. In addition by keeping a solid credit score and low debt to income ratio, you will often qualify for lower interest rates on everything from credit cards to insurance by making this a strong strategic move toward lowering all of your bills at one time.
It can be helpful to contact your current lender first especially if you have just purchased your home. Since you may have a recent appraisal on file, you may be able to save on closing costs (typically $3000-10,000 dollars on moderately priced homes) and be able to move more quickly by working with the same mortgagor. Do not overlook the internet though as you should investigate online lenders as well.
Always pay close attention to fees and closing costs, as with a first mortgage. These will include the cost of getting your house reappraised and they may differ a great deal from one lender to another. Some lenders in an attempt to secure more refinance business will offer free appraisal (saving you $300-500 dollars) so be sure to check around.
You may also want to consider limiting the term to be no longer than what is left on your current mortgage, or you will end up with much lower payments but a much longer mortgage. While this will save you money in the short term it will costs you much more in the long term.
