Have you been giving some thought to how you might be able to save money if you refinanced your mortgage? How do you decide if it's really worth it? Here are four signs that show you might want to sit down with a banker and explore refinancing seriously.
- Interest rates are moving. If your mortgage has an interest rate that is several years old, it might be time to refinance. Mortgage interest rates fluctuate. If the Federal Reserve Bank raises interest rates, mortgage rates will likely follow.
- You have substantial equity in your home. Equity in your home can be accumulated by your monthly payments or by the value of your home increasing. Either way, it's good news. You can ditch PMI (private mortgage insurance) when your home reaches its 80% loan-to-value ratio. A lower loan amount likely translates to a lower interest rate, saving you money on your payments.
- There is a positive change to your credit score. Bank loans often involve a cargo-shipload of paperwork -- including your credit history. Indeed, you may not have realized it at the time, but the interest rate on your conventional loan was based on your credit score at the time of application. A current, higher score usually translates to a better interest rate.
- Your income increases. The promotion comes through. A major client signs the contract. Your book was sold to a publisher. These are all good things that relate to more money in your pocket. Take that to the bank -- literally. Secure a better interest rate based on your increased ability to repay the bank loan. Or you could refinance to obtain a 15-year vs. 30-year fixed rate to increase your equity.
- Your relationship status has changed. Breaking up is hard to do. Throw real estate in the mix and things get complicated. Division of the assets usually includes the residence, and that means each party's share of said assets. Refinancing the home is one way of "buying out" the other party involved.
Know Your Options
Once you've decided to explore financing, think about the kind of mortgage you want. You'll have a lot of choices. Below are some terms you should know, in order to make a choice that's right for you:
Jumbo Loans: Mortgage amounts greater than $417,000 (except for homes in Hawaii, Alaska, and the U.S. Virgin Islands) are considered jumbo loans. These types of loans mean more money is doled out by the bank and consequently they're riskier for the lender. Banks mitigate their risk by charging higher interest rates to borrowers.
Conforming Loans: A loan amount under $417,000 is called a "conforming loan" because it adheres to guidelines set by Fannie Mae and Freddie Mac, buyers of secondary mortgages. Banks will typically sell qualifying loans to these government sponsored entities to free up cash.
Conventional Loans: Any mortgage issued by a lender, but not backed by the federal government. Both conforming and jumbo loans fall into this category, but only conforming loans sell on the secondary market.
Let's talk about how refinancing can help you get a better rate, or move you closer to your financial goals.