Taking out a new mortgage loan with a new term and interest rate to replace your current mortgage loan can lead to a potential savings of hundreds of dollars a year. Benefits of refinancing include lower monthly payments, locked-in low rates, and additional cash on hand every month for purposes ranging from home repairs to paying down consumer debt. Here, we offer some tips and advantages to refinancing your mortgage to help you determine if this is a smart move to assist you with saving at this time. As always, please contact your local PERL mortgage officer if you have any questions.
Lowering the loan-to-equity ratio and foregoing private mortgage insurance
If your down payment when you purchased your home was less than 20 percent of the purchase price, you likely had to buy PMI that costs about 0.5 percent to 1 percent of the loan amount annually. For a $300,000 house, that could mean up to $3,000 per year. After owning your home for a few years, building equity and changing your loan-to-equity ratio, you may be able to refinance at a lower interest rate and without the PMI. Assuming a 1 percent PMI savings on a $300,000 home, you could apply that extra $250 per month to your mortgage payment and pay off your loan seven years earlier.
Put a plan in place for the savings you’ll incur monthly
Whether it’s investing, paying down your mortgage or another use, make sure the savings don’t get wasted. If you do refinance, PERL usually grants a grace period before the new mortgage payments begin. This grace period can be a month or more, so take advantage of that month’s mortgage payment you don’t have to make. Some good options include paying down a credit card or taking care of a home repair you’ve been planning.
Watch out for excessive closing costs
It’s important to know how long you plan to stay in the home. For example, if you plan to move within two years, the fees might not warrant the savings from PMI or from lower monthly payments. Be sure to do the math and calculate how many months of mortgage savings you’d need to make it worthwhile.