Conventional Mortgage Refinance - How to Decide
Whether you are considering refinancing your existing conventional loan, or you are looking to refinance into a conventional loan from an FHA loan or VA loan, there are many things to consider.
First and foremost, there is one myth that simply isn't true, that many people believe. The myth is that your interest rate must go down by a certain percentage in order for the refinance to make sense. Nothing could be further from the truth. Why you ask?
The first reason is that you must look at the benefit and break even period. If you lower your rate by the same percentage on a smaller loan amount vs. a larger loan amount, you will receive a smaller benefit even though the % of the rate drop is the same.
Also, you must look at the closing costs. And by closing costs, I mean fees; Underwriting fees, title company fees, appraisal, etc. You will also see charges on your closing statement for your new escrow account (taxes and insurance), but you will get a refund from your current lender for what they have in escrow, so these are technically not fees because you will pay taxes and insurance whether you refinance or not. If the closing costs are higher, you will need a longer period of time to recoup the cost regardless of how much you are able to lower the rate.
We help many home owners with no closing costs refinances, so the recoup period is virtually zero months. In this circumstance, a smaller drop in the rate can make a lot of sense because there is no cost involved. So again, if your goal is to lower your monthly payment, then the most important factor is the recoup period and the overall cost of the loan.
But there are a few other major reasons why home owners choose to utilize a conventional refinance, and those are to pull cash out, get rid of PMI, or to consolidate debts. Let's take a look at these options.
Cash Out: If you are pulling cash out for whatever reason, in many cases lowering the rate is not the highest priority. If you can lower the rate, that is an added bonus, but to be able to access your equity is the number one goal. Visit this link for more on a cash out refinance.
Get rid of PMI: Getting rid of PMI is a smart decision, and if you have a conventional loan already, you may not need to refinance. After 2 years, you can apply with your current lender to get rid of the PMI, and will only incur the cost of an appraisal. However, if you can also lower your interest rate through a refinance and get rid of the PMI at the same time, the savings can be substantial. Click here for more on getting rid of PMI.
Consolidate Debts: There is a huge financial benefit to pay off higher interest rate debts. In this circumstance, the rate on the new loan is not nearly as important as the overall debt loan and interest you are eliminating. This can be an extremely wise decision, and we would be happy to help you analyze your current liabilities to see if this type of refinance makes sense. Visit this link for more on debt consolidation loans.
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