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Now that you are a proud homeowner, the next major decision is whether you should refinance and lower your interest rate. The direction of market interest rates shouldn't impact your decision. Instead, you should refinance when it makes sense to you based on the following criterions:

1. How long are you planning to stay? You should consider refinancing when you can recover the closing costs in less than 5 years and that you are planning to stay at the property longer than 5 years. For example, if your new mortgage had costs of $5,000 and monthly interest savings of $200, then your payback period will be 25 months.

2.  Lock in a fixed rate mortgage. If you have an Adjustable-Rate Mortgage or ARM's - your monthly payments can move up and down as interest rates fluctuate. The closer you are to the re-set date and the longer you plan to keep your home, the riskier the adjustable-rate mortgage is. You should consider refinancing it into a fixed rate.  

3. Stop paying private mortgage insurance (PMI). If you have FHA loans originated in 2015 onward, refinancing to a Conventional loan is the only way to remove monthly PMI.  Private mortgage insurance protects lender if you don't pay back your loan. It is required if you put down less than 20 percent of your home's purchase. Now that you have at least 20% equity, refinancing from a loan with PMI to a loan without PMI make sense even if your rate is higher because you won't have to pay the monthly mortgage-insurance premium. Your new total monthly payment will be less than what you were paying before.  

4. Removing or adding a borrower. Whoever is named the borrower on a loan is responsible for making the payments. In a divorce agreement, the party who was awarded the house should refinance and remove the x-spouse of the deed of trust. Without refinancing - both names are still on the hook as far as the lender is concern. So potentially, if a spouse awarded the house defaulted, the ex-spouse's credit is equally destroyed.  

5. Cash-out refinancing. You can draw down on your home equity for some cash-out for any reason. Another option is to get a home-equity line of credit. You can use the proceeds to invest in stocks or mutual funds as long as you are not relying on your investment gains, plan to keep your home for a long time and have an excellent credit.  This strategy would work in rising home equity market and in positive Return-On-Investment (ROI) scenario.

You do not have to start over again with another 30 Year Fixed. Ask me about Fixed Mortgage products from 15 to 29 Year Fixed. Be advised that your monthly payment will go up if you choose a shorter maturity product. Use this online loan calculator to estimate your payment.

Unlike when you first bought the house - you do not have to have funds at closing. You have an option to finance your closing costs or pay for it at closing.

Posted in:Refinance and tagged: Refinance
Posted by Sam Kader on December 19th, 2017 6:41 PM

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