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Should I Refinance My Home

You're a full-fledged homeowner and enjoy the peace of mind that comes from having a place to call your own. Becoming mortgage-free is likely your destination, but are you taking the best route?

Maybe you're interested in a new mortgage that better suits your financial needs and goals along the way. Refinancing your house may be just the refresh you're looking for. This article can help you decide if refinancing is right for you.

Why You Should Consider Refinancing Your House

Refinancing your house could be a worthwhile option to explore if:

  • Interest rates are lower now than when you took out your home loan.
  • Changing life circumstances have affected how much you can pay monthly.
  • You want to switch to a fixed-rate mortgage from an adjustable-rate mortgage (ARM).
  • You have other debts you want to roll into a new mortgage to simplify payments and save.
  • Private mortgage insurance (PMI) no longer makes sense for you, and you want to drop it.

These are a few of the main reasons to consider refinancing your house. But before you go ahead with refinancing, be sure you understand how it works and how it will affect your finances.

What Does It Mean to Refinance a House?

Refinancing a house means replacing your original mortgage with a new one. You take out a new home loan with the same lender under different terms or with a new one. Funds from the new loan pay off your old loan in full, so you are only responsible for paying the new one.

What Are the Benefits of Refinancing a House?

Depending on your situation, you could gain one or more of the following financial benefits:

Lower Interest

If interest rates have fallen since you took out your mortgage, you may secure a lower interest rate on your debt by refinancing. You may also qualify to refinance at a lower rate if you've improved your credit score. Depending on your loan's duration, you could save a substantial sum with a lower rate.

Lower Payments

If you need more room in your budget, refinancing could help you arrange lower monthly payments with a better interest rate or a longer loan. A longer repayment period usually means paying more overall, so consider this and work with a lender who helps you understand your options.

Shorter Term

Changing the term of your loan could be a refinancing option for you and help you save on interest depending on your specific situation. However, a shorter term could mean raising your monthly payment, so make sure you totally understand the impact to your budget.

Tax Benefits

In some cases, refinancing could save you money on taxes. For example, if you switch from a 30-year to a 15-year mortgage, you may qualify for a higher mortgage interest deduction along with your higher interest rate. Consult a tax professional to understand how refinancing will affect your taxes.

Debt Consolidation

If you have multiple debts, especially ones with higher interest, refinancing your mortgage could help by consolidating debt. Debt consolidation means combining several debts into one with the lowest possible interest, reducing the number of payments you're juggling and possibly saving you money.

Fixed Interest Rate

You could switch from an ARM to a fixed-rate mortgage when you refinance. Switching is most beneficial when rates are low and you can lock your interest rate in to protect yourself when they rise again. Fixing your interest rate also helps with your budgets and financial planning since your loan costs are more predictable.

Equity Access

If you've been working on your original mortgage for a while, your home equity — how much is already yours rather than the bank's — has probably grown. You earn equity when you make payments that reduce your debt, your home's value increases or both.

If you have an urgent financial need or want to invest in home improvements, you could cash out some of this equity when you refinance. Cashing out equity often leaves you with more debt to repay, so work out the numbers with a reputable lender before doing this.

Dropping Private Mortgage Insurance

If your initial down payment was less than 20% of your home's value at the time, you probably had to take out PMI. If your equity in the home has now grown past 20% of its current value or you have enough extra cash to contribute, you could drop PMI with your new loan and reduce your monthly payments. Remember that you can request to drop PMI without refinancing if you have enough equity, so this is usually an added benefit rather than a reason to refinance.

Key Considerations for Refinancing Your House

With all the potential benefits, you may be in a situation where refinancing your home is a good idea. However, it's important to consider all the implications and make an informed decision. Refinancing involves costs that you should balance against its benefits. Here's what you should know before refinancing:

  • Closing costs: Along with the sum you borrow and the interest, you also pay a fee to close a mortgage. When you refinance, you pay closing costs again. You can avoid these through no-cost refinancing. But that usually rolls your costs into your debt, so you still have the extra cost.
  • Credit score: Refinancing will involve a hard credit check to see if you can afford the new terms. This check can cause a temporary drop in your credit score. Consider improving your credit score before refinancing to get the best interest rate and offset any hit from the credit check.
  • Tax implications: If you secure a lower interest rate through refinancing, your mortgage interest deduction amount may be reduced. Cashing out some of your equity for personal use can also impact your taxes. Consult a professional to understand the tax implications of your refinancing plans.
  • Prepayment penalties: Some mortgage agreements include a penalty if you pay your loan before it's due. Refinancing can trigger this clause, so check your current mortgage terms and factor in any penalties.
  • Insurance costs: Depending on the new loan's terms and any changes in your home's value, you may need to pay PMI even if you didn't before. Check whether you have enough equity to avoid PMI. If not, factor in any additional cost.
  • Interest rates: If interest rates have risen since you closed your original mortgage, you may not benefit from refinancing. Ask your potential new lender about the interest rate they can offer you. If it's similar to or higher than your current rate, waiting or exploring other options might make more sense.

How to Refinance Your Home With First Commonwealth Bank

The best way to know if you're getting the best deal on your mortgage is to explore your refinancing options. At First Commonwealth Bank, we offer professional guidance to help you discover whether refinancing is right for you. If you choose to refinance, our First@Home refinancing solution provides a custom arrangement to meet your needs and achieve your goals. You can refinance your home through our straightforward online process.

At First Commonwealth Bank, we provide up to 99% financing with no mortgage insurance required. Plus, when you apply for First@Home refinancing, you get access to free homeownership counseling classes to help you make an informed decision before closing your new mortgage.

Contact First Commonwealth Bank to discover if refinancing is right for you and get the deal you deserve.