Refinancing your mortgage can be a great way to save money in the long run. Typically, you would refinance when mortgage rates are lower than your current loan rate, allowing you to pay less interest over the life of the loan. But while this idea seems pretty simple, refinancing can get a little complicated when it comes time to consider when to do it and what loan option to take. Here are some tips to help you navigate refinancing for the first time.
Refinance with a goal in mind.
You can refinance to reduce your monthly payment, pay off your loan faster, or even to take out some of the equity in your home. (In this case, you'll be borrowing more money than you owe on your mortgage currently.) Any and all of these goals are fine, but you should know what your ultimate goal is before you start looking into refinancing options. This will help you choose between your various loan options. For instance, if your goal is to pay off your loan sooner, then you might choose a 10-year loan even though the monthly payments are slightly higher. On the other hand, if your goal is to lower your monthly payment, you may choose a 30-year mortgage even though it has you paying longer.
Aim to get out of your FHA loan.
If you took out an FHA loan, as is common with first-time home buyers, you want to switch to a conventional loan when your refinance. This comes with a few benefits. First, it gives you more options. Not all banks offer FHA loans, but most do offer conventional mortgages. Second, it allows you to get out of the private mortgage insurance you are likely still paying because it was a requirement with your FHA loan. This will save you an additional $100 a month or more.
Remember you can pay extra towards the principal.
Maybe you want to pay off your mortgage in the next 10 years, but the best rates right now are on 30-year loans. Don't dismay! You can refinance to a 30-year mortgage and then make extra payments towards the principal of your loan, enabling you to pay it off in 10 years anyways. In fact, this is a very smart way to save even more in interest. Don't get too hung up on having to take out a mortgage with a longer payback period than you'd like since you can always take advantage of this workaround.
If you need any more tips and advice for refinancing, reach out to an escrow company like Liberty Escrow Inc near you. They can let you know what has worked for others in your situation.