Refinancing Mortgage:
Should you refinance your mortgage? Mortgage refinancing traditionally is not a common practice, however, interest rates have fallen signifigantly. In fact the Mortgage Bankers Association (MBA) estimates that there was over one trillion dollars worth of mortgages refinanced in 2004. The predicted amount of refinancing was 500 billion. Clearly, mortgage refinancing is increasing, if not booming.
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Reasons to Refinance Your Mortgage:
One of the common reasons to refinace your mortgage is to get rid of mortgage insuance. Another is to change from a variable rate loan to a fixed loan (or the other way around). Another common thing is being able to cash in on the equity of the home, and finally, the most common reason for refinancing your mortgage is a lower interest rate!
Mortgage Refinance, Does It Remove Insurance?
Usually, if you downpayment on your home is less than 20 percent of the homes value you must purchase mortgage insurance. The amount of the insurance is based on the amount of money you borrowed for the mortgage. If you wish to avoid mortgage insurance, you can get a second mortgage (known as a piggy back loan) for the homes value.
One way of removing mortgage insurance is by reappraising your home, if value has increased, then your equity may be great enough to exceed 20 percent of the homes value - and you won't have to pay mortgage insurance. However, this will not work during the first two years you own your home. During this time you are viewed by the banks as a "risky" lender, and they will not allow the mortgage insurance to lapse. Even worse is if you miss mortgage payments - they will consider you such a risk that you might not get the insurance removed for up to 5 years!
The other way to remove the insurance is to refinace your mortgage. When you refinace your mortgage, your home is reappraised. If the new loan is less than 80 percent of the value, then you will not have to pay for mortgage insurance. So, even if rates have not fallen much since you purchased your home (and in the current climate, the odds are that they have) you can save your self monthly insurance payments that you no longer require.
Cash Out With Mortgage Refinancing:
If you have built up equity in your home, then refinancing your mortgage may be a good way of extracting cash from the home. Imagine you bought a house worth $150,000 a few years ago. Now, the house is worth $200,000, And you now have $50,000 worth of equity. Since you original loan was for $100,000, you can now refinace and pull $50,000 cash out of the home. The best part of this is that the cash gained from refinancing your mortgage is non taxable, in fact, in some cases it is deductible.
Refinancing Your Mortgage, What You Need to Know:
You obviously need to know things such as all the details surrounding your mortgage - interest rate, amount of equity etc. However, it is also strongly advisable that you know your credit score. If you do not know your credit score, or know what it is you can find more on it here. If your credit rating was bad when you purchased your home, after 3 years of paying your bills and debts on time it is likely your credit score has improved dramatically, this will allow you to refinance at a lower rate.