There are many good reasons to refinance your home, and doing so may help you reduce your overall debt as well. A lot of people bought there homes several years ago, when interest rates were higher, and they may not have refinanced to take advantage of lower interest rates. Some people have a competitive interest rate, but are paying $50 or more per month for PMI, Personal Mortgage Insurance. This is when the bank allowed you to get approved for a mortgage when you had less than 20% down for the cost of your home. Other people have a great interest rate, but it is a variable rate and in the next two years may not be so great anymore.
If you are paying more than 6.75% interest, you should seriously consider refinancing,. On a 30 year fixed rate mortgage, each quarter of a percentage point makes up $17 per month on a $100,000 loan. That is $6,120 over the full 360 months of the mortgage.
The savings increases if you consider how that $17 per month could help you reduce your credit card debt, or even if you use it to pay off the mortgage early. This become even more of a saver if you can eliminate PMI payments in addition to getting a lower rate.
Banks insure your mortgage if you make a down payment of less than 20% of the value of the home. This is key to note that it is based on the home’s worth, not the amount of the loan. They in turn add the PMI premiums to your mortgage, meaning you are paying for them to insure your loan.
With the increase of property value over the last few years, many homes are worth substantially more than when they were purchased. If you bought a house for $100,000 three years ago, and in some areas where it may be valued at $110,000 or more now, you can see how this can get you over the threshold of the PMI index. If you loan balance is less than 80% of the current appraised value of your home, you can request that the bank cancel the PMI.
Using our example, when the $100,000 home was purchased you could figure paying that extra monthly premium until your loan balance was under $80,000. If you had the home reappraised for $110,000 you could get out of the PMI payments if your loan balance was under $88,000. That is a significant difference, and you may be able to get out of the PMI payments two or three years early if not more. That will lower your monthly mortgage payment by around $50 or so, but your PMI cost could be much higher depending on the amount of your mortgage.
You may be able to get out of your PMI charges without refinancing if you have your home appraised and contact the bank with the new value, provided you are more than 20% vested (This is the same as saying that you owe less than 80% of the value) depending on the contract for your mortgage. A lot of banks offer refinance mortgages with low closing fees, and can drop the PMI charges as well if applicable.
If you have a variable rate mortgage, it may make sense to pay slightly more each month now to lock in a rate that will be markedly lower then the rate that your current loan will be in two or three years. It may be in your best interest to contact your current loan holder as they may be able to assist you in rolling your mortgage over to a lower rate, or a fixed rate in order to keep your business. If you can get your monthly payments down through lower interest and/or saving on PMI costs, you can turn the savings around for immediate use on paying off your credit card or other debt and not have it affect your budget whatsoever.
One final word of advice, it is almost never a good idea to roll any other form of debt into your mortgage. Even if you have a credit card with an absurd interest rate like 20%, rolling the amount of this loan into your 6.5% mortgage may sound like a good idea, but 6.5% interest for 30 years is a lot more interest than that 20% for 5 years, provided that you are working hard to pay off that debt. That is an example of the magic of compounding.
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