Every month that you’ve paid on your mortgage, you’ve been building up equity in your home. This means the longer you’ve owned your home, the more value you’re sitting on. Depending on how much value there is, you have a variety of options for what you can do with a mortgage refinance.
For many homeowners, you’ll want to refinance out of your Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP) you received when you initially purchased your home with less than 20% down. For the rest of you, you may want to take cash out of your home to pay for a variety of things.
No matter the type of loan you received, all loans are eligible for refinancing and it couldn’t be easier with NewCastle Home Loans! A refinance is essentially re-negotiating the terms of your loan with your preferred lender and coming to a mutual agreement of new terms.
Let’s take a look into your options when refinancing, the benefits, and some of the technical details.
Getting rid of Private Mortgage Insurance and Mortgage Insurance Premium.
Private Mortgage Insurance (PMI) is an insurance against default on the loan due to lower Loan-to-Value (LTV) with smaller down-payments. Mortgage Insurance Premium is very similar, with the main difference being there is an upfront cost to MIP and these won’t “fall off” in the same way that PMI payments will. If you put less than 20% down, you’ll have PMI included in your mortgage payments until you pay your principal (loan amount) down to 78% of the home’s value at the time of purchase or for the life of your loan if you used an FHA loan with less than 10% down as these use MIP.
Part of the process of refinancing your mortgage would include a new appraisal to determine the current value of your property based off of recent sales in your area and then reviewing the new terms and rates available for your refinance.
Here’s a quick reference for FHA MIP financed properties. Depending on when you purchased and how much you put down for your FHA mortgage, your MIP may or may not fall off automatically. Regardless of the table below, all are eligible for refinancing to have this removed with your new loan.
Refinancing for a better rate and term.
Whether or not you’re looking to get out of PMI, it’s very popular to refinance your mortgage for a more favorable rate and a new term. You might hear this referred to as No Cash-Out, Rate-And-Term, or Straight Refinance. But they all mean the same thing - you’re refinancing your loan and nothing else.
If you want to take a quick look into what your new mortgage would look like in a refinance, use our free and anonymous mortgage calculator on our homepage. If the rates and the payments seem good, we can help you start saving today!
Additional reasons people look to Straight Refinance.
- There are better rates available than when you initially closed. Perhaps you used lender credits to offset closing costs, which raised their rates for the life of the loan.
- You used an Adjustable Rate Mortgage (ARM) and are coming up on the adjustable period.
- You closed your loan with a term that worked for you before, but now want to change it. You can extend a mortgage term, keep it the same, or reduce it.
- To add/remove someone to/from your mortgage.
- To lower the payment on your mortgage.
When you refinance your loan for a lower interest rate, one item to keep in mind is you’ll be paying less in interest (yay!), but this also means you’ll have that much less to deduct come tax time. Ultimately, this is still a benefit to you as you can now choose to save that money, spend it, or do anything else you like with your newfound financial freedom.
Finally, we’ve come to Cash-Out Refinances!
This is where it gets exciting. There are three primary ways to get your home to an equity/value position where you’ll be able to take cash out of your home:
- The longer way is to pay down your mortgage over years as agreed. This is effective, but not a fast way to build equity. As all homeowners know, it’s infinitely better than renting since you’re still putting money into your own pocket at the end of the day. If you’ve already paid off your home, you’re in a great position to refinance as you can use as much or as little as you need! Having a free and clear home leaves you with the most options.
- You could also pay extra each month. This can be a few dollars to a few hundred dollars. Anything additional you’re putting into your required payment will pay down your principal loan balance faster. Consider this: If you paid $50 additional each month towards your required payment, you’d have paid an EXTRA $600 dollars off of your principal by the end of the year. It doesn’t sound like much, but when you combine this with the principal and interest payment you’re already making, this can end up being quite the windfall over a few years and certainly enough to make the difference come time to refinance for whether or not you new Loan-to-Value (LTV) is below 80%.
- Renovate, renovate, renovate. You don’t have to flip properties to want to maximize the value of your home. When you closed on your initial loan, the house you bought was okay, but you had a dream to make it a beautiful home. After a lot of hard work (and money) you’ve managed to make it perfect to your vision. Depending on what types of renovations you completed, you may have dramatically increased your home value in a short window. Property flippers do this all the time and will then sell the house for a profit. But you could also refinance your property to capitalize on your newfound equity!
There are many reasons why someone would want to take cash out of their existing home. The more equity/value you’ve built up, the more you’ll be able to take out should you so choose. As for why someone would use a Cash-Out Refinance, the reasons are nearly infinite, but here are some of the quick examples: Paying off debt, buying someone out of a house, investing, home renovations/repairs, vacation, trips to Las Vegas, and anything else you can imagine.
Now that we have a good idea on refinances, it’s important to identify the reason you’re looking for a refinance first. You could be looking to get rid of PMI, you may want to get a better rate and term, and you may want to take cash out for any number of reasons. Your home is one of your biggest investments and deserves careful consideration. If you’d like some help with considering whether or not a refinance would be a good fit for you, reach out to me via email or give me a call at 847-471-7399. I’d be happy to help you with making the decision for a better financial future today.