Home mortgage refinancing is a way for borrowers to secure better interest rates, terms and conditions on their home loan. The reasons for refinancing an existing mortgage are many. What follows is an examination of the economic factors that motivate homeowners to make the decision to refinance a mortgage, and why it might make sense for you.
What Is Refinancing?
Refinancing is a method of obtaining a new mortgage to pay off or replace an existing mortgage. Reasons for refinancing include reducing monthly payments, lowering interest rates, swapping out a variable rate for a fixed rate, pulling cash from home equity, shortening a loan term or attaining some other economic benefit.
Private Mortgage Insurance
Private mortgage insurance (PMI) is a risk-management product that insures lenders against the risk of loss due to default. PMI is frequently required when a buyer makes a down payment of less than 20 percent of the purchase price. PMI will remain in effect throughout the life of a mortgage unless the borrower acts to avoid it. The home loan experts at Sente Mortgage advise people who are thinking about getting a refinance in Austin to consider escaping mandated PMI payments through refinancing. Here’s how. A recent uptick in real estate values within certain regions of the nation elevated many homeowners to a new status where they now have 20 percent equity. This is basically the cutoff point where private mortgage insurance is not needed. Refinancing now can get you out of PMI.
Costs and Economic Benefits
There are costs associated with refinancing a home mortgage. These costs can total three percent or more of the principal amount of a new mortgage. For this reason, you should only consider refinancing if you are absolutely sure that it makes economic sense to do so. If you do not plan to remain in the home for more than a few years, it may not pay for you to refinance. For borrowers with long-term plans to stay, swapping out a 30-year loan with a new shorter-term mortgage (15-years or less), makes good economic sense. This strategy may not lower your payment, but it will get you “free and clear” many years ahead of your original schedule.
Risk Avoidance
The risks associated with refinancing flow mainly from ignorance and lack of planning. The absence of a sound financial plan can actually cause a borrower to do himself more harm than good. One example of this is the homeowner who borrows against his home equity to pay off debt only to discover that a replenished consumer credit line is just too tempting to resist tapping into once more.
As people work through their careers and make their mortgage payments, they will, across time, build up significant home equity. That equity can be an important financial planning tool. Indeed, mortgage refinancing does offer certain homeowners a needed financial lifeline. Of course the benefits of such a lifeline can only be realized when borrowers take into account all of the economic factors that influence their overall financial situation.
