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When should I refinance my mortgage?

A mortgage refinance is when a homeowner replaces their existing mortgage with a new one. Your original loan covered the purchase price of your home. A refinance loan is a new loan that pays off the balance on that original loan. The refinance loan is almost always a smaller loan. You’ll no longer make payments on the original loan and begin new payments on the smaller refinance loan.

Several reasons refinance can be a good move.

Refinancing your mortgage is way of taking full advantage of your greatest asset, your home. Refinance can make it possible for you to reduce your expenses or to put the equity you’ve built up in your home to good use. Depending on circumstances, it can be a great move.

Here’s how refinance can be a positive move:

  1. Lower your interest rate. If you are paying a higher interest rate on your current loan than what’s available now, or if your credit has improved, you may be able to qualify for lower interest rates if you refinance. You could save hundreds in monthly interest payments.
  2. Access funds for home improvements. You can refinance in order to cash in on the equity in your home. When the refinance loan is for more than the remaining principal on the old loan, you receive the difference in a cash payment. If you use the money for home repairs or improvements, you may be able to deduct the interest expense from your taxes . Plus, home improvements usually increase your home’s appraisal value.
  3. Lock in a better interest rate. If you are in an adjustable rate mortgage (ARM) and current interest rates are low, you might want to refinance to a fixed rate mortgage at a lower rate. By the fixed rate structure, you never have to worry about the rates going up. In fact, you have the security of knowing your rates will never go higher.
  4. Eliminate private mortgage insurance (PMI). The duration of PMI is determined by the loan to value. If LTV is 90% or greater at closing, PMI is required for the life of the loan. Otherwise, it may be canceled after 11 years.
  5. Change to a shorter loan. You can refinance to a loan with a shorter life. For instance, instead of 30 years, your refinance loan may be for 15 years. This enables you to own the home outright sooner. And with fewer monthly payments, you’ll pay less interest over the life of the loan. However, the shorter loan may come with an increase in your monthly payment.
  6. Change to a longer loan. If you refinance to a longer loan, you can reduce your monthly payment. The loan will be longer, but your monthly expense will shrink.

When is it right to refinance?

It’s a matter of timing. If you answer yes to any of these questions, the time might be right.

  • Do you have substantial equity in your home? (Equity is the difference between what you owe to the mortgage company and the home’s value).
  • Would refinancing make a reasonable reduction (between 1% and 2%) in your interest payments?
  • Do you plan to stay in your house for the next several years?
  • Are current interest rates significantly lower than the rate of your current mortgage?

Some factors to remember.

Most lenders will require that you have maintained your current loan for at least one full year before you can apply to refinance.

A refinance loan requires almost all the same costs, fees, and paperwork as your original mortgage. It’s basically the same process and with the same requirements, like credit scores and financial history. You can expect it to cost between 3% and 6% of the remaining principal, and you will probably pay up to 2% or more in closing costs. These fees can include:

  • Application fees
  • Title insurance and title search
  • Attorney review fees
  • Points and fees incurred in the loan origination

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