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When you get a new mortgage to replace your current one, it’s called mortgage refinancing. While the U.S. economy slowed in 2020, record low-interest rates have led to a massive rise in mortgage refinancing, reaching the highest activity since 2003.

With mortgage refinancing growing in popularity here in Michigan and across the nation, you are probably wondering what it entails and whether it would be a good move for you and your finances. This article gives you all the information you need to know about refinancing your mortgage, the pros and cons, and when is the right time to do it.

 

How Does Refinancing Your Home Work?

Refinancing your Michigan home means you get a new mortgage. But how exactly does that work? When you took out your mortgage the first time, the money went to the property owner.

When you refinance, the money you borrow goes to the lender of your original loan to pay off the outstanding balance.

To refinance your mortgage, you need to qualify for your new loan. Lenders’ requirements may have changed since you took out your original mortgage, and your personal financial situation may have changed as well, allowing you to get a better deal.

To refinance your mortgage, you file an application, go through the underwriting process and then close your deal – exactly like you would have when you purchase your home.

 

Pros and Cons of Refinancing Your Home

The type of loan you are applying for will determine the pros and cons of refinancing your home. However, there are some common pros and cons you can look out for. Let’s do the good news first.

 

Some of the pros you may expect from refinancing your Michigan home include:

    • Lower interest rates
    • Lower monthly payments
    • Reduction of private mortgage insurance (PMI)
  • Shorter time to pay off (potentially)
  • Obtain the equity in your home and use it to make other purchases or investments

 

Some of the cons you might see from refinancing your Michigan home include:

  • The closing cost – this includes things such as appraisal fees, underwriting fees, and attorney costs.
  • If you use your equity to pay off other debts such as credit cards, you need a clear financial plan in place to not fall into the trap of overspending again when the cards are wiped clean.
  • Most banks have limits on how much equity you can pull from your home.

 

When To Refinance and When Not to Refinance

Before you start the refinancing process, you need to think about why you want to do it and if now is the right time.

Lower Your Monthly Payments

If you want to lower your monthly mortgage payments, you can refinance to a mortgage with lower rates. As the current interest rates in 2021 are very low, this is a goal many are looking to achieve.

However, there is also the option to extend the term of your loan. You can pay your lender for a more extended period of time and reduce the monthly cost of your mortgage without having to refinance. With this option, you won’t be able to reduce your interest rate and you’ll end up paying more interest, but you won’t have to worry about closing costs either.

Use The Equity In Your Home

When you are looking to make a purchase or investment with the equity in your home, you can look into cash-out refinance. Many people search for lower interest rates at the same time as cashing out equity to make it more worthwhile, as underwriting costs and attorney fees add up.

Pay Off Your Loan Quicker

Perhaps you have a 30-year mortgage that you want to shrink into a 15-year mortgage. The primary motivation for wanting to pay off a loan faster is that you pay less interest over the lifetime of the loan. Your monthly payments will often go up, but if you have experienced a change in circumstances that mean you can comfortably make larger monthly payments, then this is a great reason to refinance your home.

Remove FHA Mortgage Insurance

Mortgage insurance is no longer obligatory. However, this premium was not canceled on existing loans, only new loans. The only way to remove these premiums is to sell or refinance your home.

Long Break-Even Period

There are plenty of great reasons to refinance your home, but if it takes too long too long to recoup from the closing costs it’s not worth it. Basically, it’s the number of months until you see savings from your refinance. There’s no specific number of months you should be shooting for, but it should fit your budget and goals.

High Long-Term Costs

The idea behind refinancing is to see savings over the long term. So, if you don’t lower your interest rate or your payment, it may not be worth it. Another scenario in which you may reconsider refinancing is when you’ve paid a lot of interest, but not much in the principal. If you’re refinancing with essentially the same principle, you’ll be paying more in interest so you’ll have to weigh whether or not you’ll actually save money.

You Can’t Afford the Closing Costs

This one is a no-brainer. If you can’t afford the closing costs, you shouldn’t move ahead with a refi. You’ll be causing yourself hardship that won’t have any short-term benefits.

You Plan on Moving

If you plan on moving near or close to your break-even point, you’ll never see the benefit of your refinance. If you’re thinking about a refi and know you could be moving soon, you should do the math to ensure you’ll reap the benefits.

 

Current Michigan Mortgage and Refinance Rates

When considering refinancing your mortgage, you will want to check the current mortgage rates. As of July 4, 2021, Michigan interest rates are around 3.09% for a 30-year fixed, 2.41% for a 15-year fixed, and 3.50% for a 5/1 adjustable-rate mortgage (ARM).

Knowing the current rates will help you work out how much you can save on your payments. In addition, it will help you discover how long it will take you to break even with the amount saved on your monthly payments versus the cost of closing the loan.

When refinancing your home, it is a great time to also shop around for home insurance. You can look around for new and better rates. If you are looking for a better deal on your home insurance, get in touch with one of our Michigan agents, who will help you find the best coverage that will protect your investment at the best possible rate. Contact us today! We are based out of Grand Rapids, MI.

 

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