Is Is Worth It to Refinance Your Home?

If you’re contemplating whether or not to refinance your home, you’re going to need to do some math. If you stand to save money with a refinance, then you should probably pull the trigger.

Before you get to the point where you can answer that question, though, you’ll have to evaluate the cost of the entire process.

What About PMI Payments?

Private mortgage insurance (PMI) is an expense you have to pay in the event that you default on your mortgage. When you buy PMI, the insurance company will pay the mortgage company or bank if you don’t pay back the loan.

If your credit history has improved significantly and you’ve built equity into the house since you originally purchased your home, you probably won’t need to pay as much PMI after you refinance. Keep in mind, though, that the rules change if you have a second mortgage for a construction loan or home improvement loan.

If you originally purchased your house years ago with just 5% down, your PMI costs are probably going to be significantly higher than they are when you go through a refinance. In other words, you could save money on PMI with a refinance. So, from that standpoint, a refinance might make sense.

In fact, if you refinance with 20% equity in the property, you likely won’t be required to pay any PMI at all. However, if you’re refinancing with less than 10% equity, then PMI will cover 30% of the loss. If your equity is closer to 20%, PMI will probably cover 12%.

A Second Mortgage

If you’re looking to get cash out of your house, you can always avoid PMI with a second mortgage or home equity loan. The good news is that interest on both of those options is tax deductible. You may have to pay a higher interest rate, though, because of lender-paid mortgage insurance. You’ll pay that for the life of the loan, no matter how much equity you own in the property.

So What’s the Answer?

After evaluating the costs, it’s time to ask: should you refinance? If you stand to save a significant amount of money every month after you refinance, with the reduction in PMI and a lower interest rate, then yes, you should probably move forward. On the other hand, if you’ll only save a little bit of money, or none at all, then it’s best stick with the mortgage you have now.

If you’ve put on your prognosticator’s hat and are predicting that interest rates will rise, you might think that you should refinance immediately. Keep in mind, though, that nobody can predict where interest rates will go over the long term. However, if you’ve absolutely convinced yourself that now is the “bottom” for interest rates and you can reduce your rate by several basis points or more, then go ahead and refinance.

If you’re looking to refinance just so you can get cash out, then the main consideration is a competitive interest rate. In that case, you can either refinance your house to get cash out, get a second mortgage, or a home equity loan. In all cases, though, you’ll want an interest rate that’s affordable.