Owning a home is part of the American Dream. For better or for worse, a mortgage is usually a necessary part of becoming a homeowner. Did you know that you aren’t necessarily stuck with the mortgage you start with though? You can refinance your mortgage, and there are some compelling reasons for doing so.
You Can Get a Lower Monthly Payment
One of the potential benefits of refinancing your mortgage is the opportunity to have a lower monthly payment. This might mean that you have a lower interest rate to pay, that the principal portion of the payment is lower, or both. Having a lower monthly payment can save a lot of money in the long run. If interest rates are rising, refinancing from an adjustable-rate to a fixed-rate mortgage can help you avoid paying more on interest. The reverse is also true. If interest rates are dropping, it might be worth considering changing your mortgage from a fixed-rate mortgage to an ARM.
You Could Reduce Your Loan Term
Refinancing your mortgage may also allow you to reduce your loan term. Since refinancing a mortgage is essentially taking out a new mortgage to pay off the old one, you can renegotiate the terms, including how much the monthly payments will be and how long the loan will be for. Shorter loan terms often come with lower interest rates, which can make the monthly payments more affordable. There are fees for refinancing, so even with the money you’d be saving, it might take some time to break even on those costs.
You Can Eliminate Mortgage Insurance
If your mortgage was obtained through the FHA, you’re required to carry mortgage insurance. Putting a small down payment on a house may also obligate you to carry mortgage insurance. Refinancing your mortgage to a conventional loan may free you from that obligation. Whether or not you can get rid of mortgage insurance may depend on a few factors. You will be required to have accrued a certain amount of equity in your home in order to not be obligated to carry mortgage insurance. Your home’s value does matter in this case. If you’ve done various home improvements that have significantly increased your home’s value, you may be closer to that threshold than you previously thought.
Refinancing your mortgage can be a great opportunity. Though not without its costs, doing so can allow you to lower your monthly payment, decrease the term of the loan, and get rid of mortgage insurance. This not only leads to greater long-term savings, but also frees you from your real estate debt sooner, freeing up a decent portion of your income for, well, anything else.
Need more financial advice? Read this next: How Your Home Equity Can Be a Source of Wealth