Is refinancing right for you?
Boston Condos for Sale and Apartment Rentals
Is refinancing right for you?
Pros of refinancing a home loan
Refinancing a mortgage loan can be time-consuming, but the following benefits could make it worthwhile.
Potentially lower mortgage interest rate
One of the most common reasons homeowners refinance their mortgages is to unlock a lower mortgage interest rate, especially if rates have dropped since they first took out their home loan. A lower interest rate can save you a good chunk of change on interest payments over the life of the loan.
Of course, it won’t be quite as simple as the above equation. Your new monthly payment will also depend on your outstanding loan balance, new term length, and recurring fees like property taxes and homeowners insurance. But this example should give you an idea of how a lower mortgage rate can save you money.
Option to tap your home equity
You may be eligible for a cash-out refinance if you have at least 20% equity in your home. This type of mortgage refinance helps you tap into the equity in your house to cover big-ticket purchases or expenses, such as medical bills or home improvement projects. A cash-out refinance replaces your original loan with a new, bigger one. You’ll then receive the difference between the two in a lump-sum payment that you can use for any purpose.
Be careful when using money from a cash-out refi to pay off unsecured debt, such as student loans or a personal loan. While there can be consequences for not paying off these debts, it’s riskier to be unable to afford mortgage payments — you risk facing foreclosure and losing your home.
Ability to change loan terms
If you’re unhappy with your current loan features, refinancing allows you to adjust and tailor your mortgage to meet your needs. For example, you can shorten your loan term to pay off your mortgage sooner or switch from an adjustable-rate mortgage to a fixed-rate one for more predictable payments. You can also lengthen the loan term if your priority is to lower your monthly payments.
Remove private mortgage insurance
If you took out a conventional home loan and put down less than 20%, you’re most likely paying private mortgage insurance (PMI), which protects the lender should you default on your mortgage. According to Freddie Mac, monthly premiums for PMI generally range from $30 to $70 for every $100,000 you borrow. This can add hundreds of dollars to your monthly payments, depending on the size of your home loan.
The good news is that PMI isn’t permanent. Your lender has to cancel your PMI once you reach 22% in home equity, but you can request to remove it when you have 20% equity. You can also get rid of PMI if you refinance with 20% equity in the house. So, if your home value has gone up or you’ve paid down a significant chunk of your loan balance, refinancing to a new loan can help you eliminate this extra cost.
Add or remove a co-borrower
Refinancing gives you the opportunity to add or remove a co-borrower from your mortgage. For example, if you want to make changes to your mortgage after a divorce, you can refinance to remove your former spouse as a co-borrower.
Learn how to change the name on your house deed.
Disadvantages of refinancing a home loan
Though refinancing your mortgage can help you change the term of your current loan, lower your monthly payments, and get rid of PMI, you still need to be aware of some downsides.
Closing costs
Refinancing isn’t free. You’ll have to pay closing costs each time you refinance, and these costs are typically anywhere from 2% to 6% of your remaining loan balance.
Origination fee
Credit check fee
Appraisal fee
Discount points
Title search and insurance charges
Prepayment penalties
Recording fees
Real estate attorney fees
These expenses can quickly add up and cancel out the benefits of refinancing. Do the math beforehand to see how much you’ll pay on closing costs and how long it will take you to recoup those expenses with lower mortgage payments. This is what’s known as your break-even point. For example, if your break-even point is three years and you don’t plan to stay in the house that long, refinancing probably won’t make financial sense.
Potentially higher long-term expenses
A common reason homeowners refinance is to reduce their monthly mortgage payments, often by extending their loan term to 30 years. If this is what you’re looking to do, just know that you could end up paying more interest over the life of the loan since you’re stretching your mortgage out over a longer period.
Potentially higher monthly payments
On the other hand, if you’re refinancing to shorten your repayment timeline, expect your monthly mortgage payments to increase. Let’s say you are refinancing from a 30-year mortgage term to a 15-year one. Your monthly payments would increase because you’re paying off the loan in a much shorter timeframe.
Shortening your loan term through refinancing may not be your best option unless you can afford higher monthly mortgage payments.
More debt
While a cash-out refinance lets you borrow against the equity in your home, it also results in taking out a larger loan than you would with a standard rate-and-term refinance. And because you’re borrowing more, your overall debt level will go up. This can lead to a higher debt-to-income ratio (DTI), potentially making it more challenging to secure loans in the future, as lenders may view you as a higher risk.
Is refinancing right for you?
- The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances, $806,500 or less, decreased to 6.67% from 6.77%
- The refinance share of mortgage activity increased to 46.5% of total applications from 41.5% the previous week.
- Applications for a mortgage to purchase a home rose 1% for the week and were 17% higher than the same week one year ago.
Is refinancing right for you?
Is now the time to refinance your Boston condo or Boston Back Bay condo?
Boston Condos for Sale and Apartment Rentals
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