Should you refinance your mortgage? Keep in mind that everyone’s situation is different, so there’s no single answer that always works. That said, here are a few of the most common reasons why people refinance their mortgage.
Refinance Your Mortgage for a Lower Interest Rate
Interest rates on mortgages can change fairly quickly. We’ve seen people purchase a home and refinance within a year because the interest rate has fallen that much. That doesn’t necessarily mean they had a bad interest rate to begin with. It may have been very competitive in fact. But since rates dropped that fast, it made sense financially for them to refinance.
It might help to illustrate with some math. Let’s say you got a mortgage for $200,000 with a 4.5% interest rate. You can expect your monthly payments to be about $1,013.
Now let’s say the rates dropped and you were able to get a 3.5% interest rate. That brings your payments down to $898, saving you $105 per month. Over the course of 30 years, that adds up!
Note that the effect of a lower interest rate is more significant if you have a larger mortgage, such as $400,000 or when you compare it over the span of 30 years.
Refinance to Pay Off Other Debt
Another common reason people refinance is to pay off other debt. For example, let’s say it’s been a rough couple of years and you had to rack up some credit card debt. Even though you’ve been paying the monthly payments, you just can’t seem to get ahead of it.
If you owe $10,000 to a credit card with an interest rate of 18% and pay off the monthly payments, you’ll pay a total of $14,423.16 over the course of 342 months! That’s insane, and just isn’t worth the pain.
Instead, it might make sense to refinance your home and use some of the equity in your home to pay off that debt. It’s much easier to pay off that $10,000 with an interest rate of 3.5% than 18%.
This doesn’t just apply to credit cards, though. Student loan debt is astronomical right now and is crushing the hopes and dreams of millions of people. If you’re someone who is suffering from the pain of student loan debt, it might make sense to refinance. Your student loan may have a “decent” interest rate of about 7% or 8%, but that’s still double the interest rate of a mortgage.
Refinance to Get Rid of Private Mortgage Insurance
Another common reason to refinance is to get rid of private mortgage insurance. For most conventional government-backed loans, the only way to get rid of PMI is to refinance. If you have the equity or cash to own 20% of the home’s value, it makes sense to refinance and get rid of the PMI. That fee adds up to be a lot of money over time, so refinancing is a great way to save you money.
Should you refinance your mortgage? If interest rates have dropped, you have some debt you want to consolidate or you just need to get rid of PMI, we recommend at least considering it. Send us an email at Team@RyanGrantTeam.com or call us at (949)-651-6300. We look forward to hearing from you.