When people think about refinancing their homes, they often think about the long-term benefits. This makes sense, given the upfront expense of closing costs – which you’ll pay out of pocket before you close on the refinance.
But there are short-term benefits of a refinance, too! And these can also make sense to consider – just as long as you do the math beforehand. Let’s talk about both the short-term refinance advantages and the numbers!
Get rid of higher-interest debts right now
One short-term benefit of refinancing is when it helps you consolidate debts (like credit cards) with a higher interest rate than what you pay on the mortgage. You can do this through a cash-out refinance – where you turn some of your home’s equity into cash to consolidate other debts.
You may even benefit from a lower monthly mortgage payment, particularly if your new mortgage rate is lower than the rate on those other debts.
Peace of mind by changing to a fixed rate mortgage
If you have an adjustable rate mortgage (ARM), you can enjoy peace of mind right now by refinancing to a fixed rate. You won’t have to worry about the potential of paying more in the future (if your rate were to adjust higher), and you can better manage your finances because your loan payments will be predictable.
You might also save on interest, too. That’s because ARMs often come with lower initial interest rates than fixed rate mortgages. So if the time is coming when your loan is going to adjust and interest rates are higher than what you are paying now, it is a good idea to look at what a fixed rate refi can do for you.
Stop paying private mortgage insurance
Many times when you make a down payment of less than 20% on a home, the lender requires you to pay private mortgage insurance (PMI). This is a premium you pay every month.
And this is another great short-term benefit of a refinance. It can help you by ditching PMI and, as a result, lower your monthly mortgage payment. Here you’d get an appraisal to determine your home’s current value. If the balance of your new mortgage will be 80% or less than the home's value and you satisfy other criteria (such as having paid your mortgage on time) PMI may not be required.
Are the closing costs worth paying?
Closing costs often run between 2% and 5% of the loan amount. For instance, to refinance a $175,000 mortgage, you might pay between $3,500 and $8,750 in closing costs.
It comes down to what your new refi rate is and how much you could lower your monthly payment vs. how long it will take for the difference in payments to pay back your closing costs. If you’ve scored a lower rate to the point of a much lower monthly payment, then paying closing costs may be worth it. But if the short term benefits of a refinance are diminished by your closing costs, a refi may not be the best option.
Note: If you choose to refi with ditech, you may be able to roll your closing costs* into your loan! This means you wouldn’t have to worry about paying upfront and out of pocket for these costs when you close.
Want to learn more about your refinancing options? Get to know the refi loans available to you, here.
*Rolling Closing Costs You may roll closing costs into a refinance loan, depending upon several factors, including: (a) investor requirements; (b) product limitations; and (c) loan amount and loan-to-value restrictions. Closing costs that represent lender advances cannot be rolled into the loan amount, and you cannot roll closing costs into a purchase loan. Other limitations or restrictions may apply, so consult your Home Loan Specialist for your specific situation.
Ditech is not a financial advisor and the ideas outlined above are for informational purposes only. They are not intended as investment or financial advice and should not be construed as such. Consult a financial advisor before making decisions regarding important personal financial matters, and consult a tax advisor regarding the deductibility of interest and tax implications.