Refinancing to reduce monthly home expense
If you intend to stay in your home for at least five more years, and you want to cut your housing expenses, a refinance may be a great option for you. If you refinance your mortgage and get a better rate, or better terms, you can free up some cash each month and greatly reduce your monthly cost to have your home. However, a refinance is not right for everyone. The following is a look at the things you should consider before refinancing, and the kind of savings you can expect if you do so.
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The first thing to consider is the current rates. If you got your original mortgage when rates were low, there is a good chance that you won't be able to beat the rate you have, and thus the cost of the refinance will be difficult to recoup, and the savings will be minimal. However, if your credit has improved, your equity has grown, and rates are considerably lower, then a refinance can greatly reduce your monthly payment amount. If you have a 7% rate on a $300,000 loan, and can get a 4.5% rate on the same loan, your monthly mortgage payment would drop considerably, freeing up a few hundred dollars a month for you to put into a cash reserve.
The next thing to consider is how long you plan to stay in your home. If it costs you $3000 to refinance, and the refinance saves you $150 a month, it will take you 20 months to recoup the cost of the refinance before you get any actual savings. If you only plan to be in your home for 2 years, the time and effort may not be worth it. But, if you plan to be in it for ten years, then the refinance is a really smart idea. So, take the amount the refinance costs you, and divide it by how much it saves you each month to see how many months it will take before you start saving. 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 than your current rate in order for refinancing to make sense. However, if you have an adjustable rate, and rates are starting to go up, it might be worthwhile to refinance in order to lock in the lower rate, even if you aren't going to be in your home for an additional 3 years.
If you now have more equity, and have over 20% loan to value in your home, whereas you did not initially, a refinance can mean ridding yourself of PMI, private mortgage insurance, or property mortgage insurance, which can cost as much as $150 a month, and gets you very little. Private Mortgage Insurance is a type of insurance that is added to many loans if you do not put down at least 20 percent down payment when purchasing the home. PMI covers insurance to the lending banks in the event of a default. If you can eliminate it you can reduce your monthly payments from $70 to $150 per month in addition to huge interest rate savings over the life of the loan.
If a refinance is right for you, it can help you save several hundred dollars a month on your housing expense.
