Refinancing your mortgage is nothing more than replacing an existing home loan with another. Why refinance? Most homeowners refinance their mortgage because rates have fallen below the interest rate on their current mortgage.
Lowering Your Mortgage Rate
Each week, Freddie Mac comes out with its weekly mortgage rate survey which reports an average rate culled from various mortgage lenders throughout the country. Yet it’s important to note this is just an average which means consumers can find lower rates than the reported average.
This is the rate most consumers see reported. If the rate is lower than your existing mortgage, refinancing your mortgage might make sense. Yet making the decision whether or not to refinance should not be done alone. It’s something that you and I can talk about together. But getting a lower rate isn’t the only reason that refinancing your mortgage is a good idea. Here are some other top reasons.
Refinancing Your Mortgage to Avoid a Balloon Payment
One solid reason for refinancing your mortgage is to avoid a balloon payment. So-called balloon payments are those where the entire mortgage balance comes due before the term of the loan is reached. There aren’t many of these types of loans around but they’re still available. Someone with a balloon payment coming up needs to plan ahead on how to address this payoff. Someone might get a brand new balloon mortgage yet in five years the balance becomes due. Why would anyone secure such a loan?
These types of loans can offer initial interest rates lower than a standard 30 year fixed-rate mortgage. If such a mortgage has a balloon payment due in five years, the borrower might have plans to move or otherwise dispose of the property before the five year period is up. However, life plans can change, and that person might decide during that initial five year period to keep the property after all. In this instance, refinancing your mortgage to get rid of a balloon note and refinance to a traditional 15 or 30 year fixed rate would make sense.
Combining Two Existing Mortgages
Another reason refinancing your mortgage is a good idea would be to combine two existing mortgages into one. When two mortgages are taken out, they’re referred to as a first and second mortgage. The first mortgage will have a lower rate than a second. Second lien mortgages are considered a slightly higher risk than a first and lenders will offset that risk with a higher rate resulting in a higher monthly payment.
The benefit with a first and second strategy is to come to the closing table with a lower down payment while at the same time avoiding the possibility of private mortgage insurance, or PMI. If rates have fallen and equity has grown, refinancing both a first and a second can result in an overall lower monthly payment. Again, this is something you and I can go over together to arrive at a decision.
Refinancing Your FHA into a Conventional Home Loan
You can also refinance an FHA mortgage into a conventional loan. Given sufficient equity, refinancing your mortgage can mean lowering the total monthly payment. FHA loans only require a 3.5% down payment in most cases but at the same time there are two different forms of mortgage insurance, an upfront policy rolled into the loan amount and an annual policy paid out in monthly installments. Refinancing out of an FHA and into a conventional loan can result in a lower overall monthly payment. It might even make sense to refinance into a first and second lien if the equity in the property isn’t sufficient to eliminate PMI but still an option to remove the monthly mortgage insurance policy associated with an FHA home loan.
If you’re considering refinancing your mortgage, we can help. Call today and can discuss your options together.