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5 Reasons To Consider Before Refinancing Your Mortgage

Sep 21, 2022

5 Reasons To Refinance Your MortgageMortgage rates have continued to swing lately. During the recent fluctuations, you probably have considered the possibility of if/when you should refinance your mortgage to move yourself closer to your financial goals. There are a number of different reasons you can use to justify moving forward with the refinancing process.

Lowered Mortgage Rate

Perhaps the most obvious reason to refinance is if you have the opportunity to secure a lower mortgage rate. The general rule of thumb is, if you can lower your rate by at least one percentage point, then it would be beneficial to refinance. On larger loans, sometimes even just a half percent decrease in your rate can have a massive impact. A lower interest rate will reduce your monthly payments along with the total amount you pay over the life of the loan.

Make sure you are monitoring mortgage rates for these kinds of opportunities, as they do change frequently. At the time of writing, mortgage rates are soaring to nearly 6% so you more than likely won't see a rate decrease by refinancing right now.

Shortening Your Loan Term

Another reason to consider refinancing is to shorten your loan term. Thirty-year mortgage rates are noticeably higher than rates for 15-year mortgages. By refinancing to a 15-year mortgage from a 30-year, it will decrease the amount of interest you pay over the life of the mortgage. However, doing this will lead to an increase in the cost of your monthly payments. So before choosing to refinance to a shorter term, make sure to do your research and calculate if you'll be able to afford your new payment.

Cash-Out for a Big Purchase

If you need cash now for home renovations, college, or any other big purchases, a cash-out refinance can help. A cash-out refinance, as the name implies, allows you take money out of your home. Essentially, you refinance for a new mortgage that is larger than your current mortgage. After paying off your original mortgage, you'll have the difference between the two in cash to use as you see fit. This is great if you need cash for a major purchase or to pay off other existing debt, as mortgage rates are often lower than other personal loan rates. Keep in mind, though, by doing this you'll be increasing your monthly payments, so make sure to weigh if the short-term cash surplus will be worth the increased mortgage payment each month.

Remove FHA Mortgage Insurance

If you buy a home using a Federal Housing Administration (FHA) loan and don't have 20% to put down, mortgage lenders protect themselves by loss if you can't end up repaying the loan by requiring you to pay an FHA mortgage insurance premium (MIP). A borrower's MIP can range anywhere from $50 to several hundred dollars a month based on loan term, amount, and down payment percentage. This payment is tacked on to your monthly mortgage and can certainly add strain to your bank account. A way to remove this extra charge is by refinancing to a new loan that is not backed by the FHA.

Consider Costs

No matter your reason for refinancing, make sure to consider the costs of doing so. Common costs with refinancing include an appraisal fee, application fee, underwriting fees, origination fee, attorney fees, and credit check fees. With all these costs, you'll often pay between 2% to 5% of the loan amount. By using the PFCU Mortgage Refinance Break Even Calculator, you can determine if refinancing will save you money in the long run. 

Erin Ellis

Erin Ellis
Accredited Financial Counselor ®
Philadelphia Federal Credit Union
eellis@PFCU.COM
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