When is the Right Time to Refinance Your Home?

Refinancing is a positive financial move when it reduces the number of your monthly payments, shortens the term length of your loan, or allows you to build equity faster.

Mortgage interest rates have been at historic lows in recent years, but rates are climbing now. We see refinancing picking up among our NJ Home Insurance clients. If refinancing makes financial sense for your situation, all indicators point that you should act now. Refinancing can save you money over time with the right option and objective.

Five Reasons to Refinance

1. Your current mortgage is high, and a new mortgage will lower your interest and monthly payment.
2. You can exchange adjustable-rate mortgage (ARM) for a fixed-rate loan to get the peace of mind predictable payments offer.   
3. You can get lower rates by taking a shorter loan term, such as switching to a 15-year from a 30-year mortgage.
4. You want to use your equity to consolidate higher-rate consumer loans or cash out for home improvements or other reasons with a new mortgage. 
5. You want to stop paying for PMI or replace an FHA loan.  

While there are other reasons to refinance your home loan, the above comprise most of them. This report will focus on these reasons with details on each option.    

Switch to a Lower Interest Rate

Refinancing is usually a good idea when it lowers your interest rate. Refinancing your loan is a great way to save money. You should seek to get the lowest interest rate possible. A simple online mortgage calculator can help you figure out how much you’ll save if you refinance. Lowering your interest rate by replacing a 30-year mortgage frees up income to use now, but it also increases the time it takes to pay off your loan.

Switch from an ARM to a Fixed-Rate Mortgage

If you’re currently paying an ARM, you may be able to convert it into a fixed-rate mortgage to lock in a guaranteed interest rate for the life of the loan. In addition, you will incur expenses in the form of closing costs, including points, fees, and insurance premiums. Points are a prepaid finance charge paid upfront to help reduce the mortgage interest rate.

Some ARMs come with no points; others require 1 point for every 20 percent down payment. Closing costs vary depending on whether you choose a conventional or government-backed loan. You can also consider other options, such as negotiating a better deal with your current lender or finding a different lender who offers a competitive rate.

Shorten Your Mortgage Loan Term

The length of your loan has a direct effect on your monthly payment. A prime example is a 30-year mortgage with a higher interest rate and a lower monthly payment. However, if you qualify and can afford the higher monthly payment of a 15-year loan, you will pay off your loan in half the time of a 30-year mortgage and save thousands in interest payments.

You might incur a prepayment penalty when switching from a 30-year fixed-rate mortgage to a 15-year loan. In such cases, your lender may add a charge for a prepayment penalty fee, which is usually around $10 per month. However, some lenders will waive the fee once your home’s equity reaches 80% or more of your home’s value. Learn more about the specifics of prepayment penalties from your lender.

Take Years Off Your Current Loan DIY Style

An alternative is to keep your 30-year loan, providing it does not have a prepayment penalty clause, and make regular extra payments on the principal to shorten the time it takes to pay off the loan. If you have the discipline and steady income to manage the payments, it is an excellent choice to pay off your mortgage quicker. You incur no fees, points, brokerage charges, or anything else.  

Use Equity for Home Improvements or to Consolidate Debt 

You can use your home’s equity to consolidate debt or pay for home improvements. For instance, you could borrow against the equity in your house to pay off credit card bills, car loans, student loans, or even medical debts. This way, you don’t need to worry about how much money you’ll owe each month if you refinance. And by using your home’s value to cover these debts, you won’t have to worry about having enough cash flow to meet all your obligations.

Refinancing your house is most often a smart financial move. Nonetheless, it would help if you always considered your decision for refinancing when you need more cash for big purchases. And please don’t take on considerable additional debt if you’re already struggling financially. 

Refinancing Has Pitfalls

It is wise to be cautious when considering whether refinancing makes sense before taking out a new mortgage because increasing the length of the mortgage expands the interest paid. It is an important reminder to be careful with the cash-out refinancing option because treating your home equity like an ATM can create a long-term adverse effect on your finances.

It’s essential to be aware of the consequences of taking cash out when refinancing. Should housing prices come down, as they are likely to do because real estate is cyclical, they will squeeze once fat margins into significantly reduced equity. So, if you take this option, please use it as a reset to get on a budget where you spend less than you earn to create savings for your future needs. It is crucial to be logical, systematic, and pragmatic when making consequential financial decisions.

Refinance to Eliminate PMI or FHA Loan 

PMI is not a reason to refinance on its own because PMI is eliminated when you have enough equity, but it is a contributing reason to switch to an FHA loan. 

What Is PMI and Why Do I Have to Pay It?

If you have a conventional loan, your lender may require you to pay PMI (Private Mortgage Insurance) if the down payment you apply is less than 20% of your purchase price. When refinancing a conventional mortgage, if your equity is less than 20% of the value of your house, PMI is a requirement. You should keep tabs on your current home value and your percentage of equity and contact your lender to request removing PMI from your loan when your equity is greater than 20%. It’s best if you don’t wait for them to contact you.   

Refinance to Get Out of an FHA Loan and MIP Costs 

With an FHA loan, you pay an annual mortgage insurance premium (MIP) that costs you $800 to $1,050 for each $100,000 you borrow, depending on the interest rate you choose. If you don’t put down at least 10% of the purchase price, you’ll be required to pay these premiums for the entire life of the loan. So, you need to put down more than 10% to avoid paying MIPs. If your initial loan was an FHA loan, it’s a good idea to refinance with a loan that doesn’t require paying MIP.

The Bottom Line

Before contacting lenders and brokers, be ready to refinance your mortgage, especially financially. Know your numbers. Build up your cash reserves and consolidate or pay down outstanding loans.

Remember, your home equity is precious. Cash-out refinancing doesn’t help homeowners build equity or lower payments. Savvy homeowners are looking to cut costs and pay off debt. Refinancing takes cash out of your equity, hurting your ability to build wealth.

Staying Safe and Solvent

Keeping clients safe and financially solvent is the primary job of insurances – and ours too. You provide insurance documents to lenders as part of the process to help you when refinancing. It’s also the best time to make sure your limits are adequate. The shortage and cost of labor and materials are causing significant construction cost increases nationwide. And meanwhile, the value of your home has likely seen above-average increases.

Together these factors emphasize the need to review your coverages and liability exposures – primarily when refinancing – but they apply to all homeowners. Our expert local agent associates are ready to help you get comprehensive NJ Home Insurance at competitive rates as only an independent agency can.

About Dickstein Associates Agency

Dickstein Associates Agency has distinguished itself as a leading provider of personal and business insurance in the tri-state area since 1965. We pride ourselves on being advocates for our clients and providing them with quality and affordable coverages. As Trusted Choice™ independent insurance agency, we partner with various national and regional carriers, allowing for flexible coverage for each client’s unique circumstances. For more information on how you can leverage all your insurance to work best for you, and how we can secure the best insurance in the marketplace suited to your specific needs and business objectives, contact us today at (800) 862-6662 or www.dicksteininsurance.com.