There are several reasons why home owners decide to refinance their mortgages. Some are looking to pay down other debt. Others have a sudden expense, such as a child’s college tuition or a medical expense that requires a larger sum of money. Some are looking to find ways to save on the total amount of interest they will pay on their mortgage, and may even hope to pay for their home faster. When you refinance a mortgage, you exchange your existing mortgage for a different mortgage. While timing can play a role in whether it is a good idea to refinance or not, the bigger question is why you are refinancing and whether you are prepared to make the most of the opportunity. Here are some of the situations why someone might look into an FHA refinance.
Significant Drop in Interest
Interest rates fluctuate all the time, but if you have a fixed rate mortgage or an expiring low rate on an adjustable mortgage, your interest isn’t going to get any lower unless you do something about it. If there is a potential for a significant drop in your mortgage rate, refinancing is probably a good idea if you are planning on staying in your home for a while. Most borrowers can get a worthwhile benefit from an FHA refinance if the rate will drop by 2%, and many will benefit with a 1% drop. By refinancing, many will be able to lower their mortgage payment and have their home paid off quicker at the same time.
Money for Home Improvements
Many people refinance their homes and extend the length of their mortgages in order to get cash to pay for home improvements. They might need an additional bathroom or it might be time for an updated kitchen or new roof. If you are making improvements, it is a good idea to choose projects that will increase the value of your home and make it easier to sell if you want to. At Starboard Financial our experience with refinancing gives us insight as to what types of projects have the most benefit. If you are choosing between different possibilities, we may be able to help you decide which improvements make the most sense.
Money for Debt
Some people refinance in order to get a lump sum of money to pay off other creditors. Especially in cases where a homeowner is paying high interest rates on credit cards this can make a lot of sense, as long as the homeowner approaches their FHA refinance sensibly. If you are paying off debt, it is important not to make the same financial mistakes over again. If you’re going to run up your balances again, refinancing might not be the right move for you.
Shortening the Term of the Loan
If you have the opportunity for a much lower interest rate due to market conditions, your own credit worthiness, or both, you might want an FHA refinance to decrease your loan term. In most cases, a 15-20 year mortgage carries a lower rate than a 30 year mortgage anyway. At Starboard Financial, we can help you do the math to determine how much more you would pay each month on your mortgage if you refinanced. If you can fit this into your budget it may mean owning your home free and clear that much sooner.
Switching Between Adjustable and Fixed Mortgages
Depending on your situation, making an adjustable to fixed change or a fixed to adjustable change can make sense. Converting to an ARM is good for starter homes that the borrower plans to sell in the next few years. Switching to a fixed rate is good for those who stand to have their interest jump after a lower starting ARM. In any case it is important to remember that extra upfront costs are incurred when you refinance.
If you have questions about an FHA refinance or any other home loan option, our associates in either our Gilbert, Arizona or Chicago, Illinois offices are happy to help. Contact us here.