It is no surprise that mortgage refinancings have been on an upswing over the past year as rates have fallen to historic lows. Have you taken advantage of this opportunity to lock in lower monthly payments? While most people focus on the extra monthly cash flow as the deciding factor in determining whether to refinance their homes, there are other advantages to consider.
One such advantage to refinancing your mortgage lies in the potential to lower your loan to equity ratio which could in turn remove the need to pay for private mortgage insurance (PMI). What exactly is PMI? PMI is a risk-management product that products mortgage lenders against potential losses if a borrower defaults. PMI is typically required when home buyers put down less than 20% of the home’s value upon purchase.
PMI typically costs between 0.5% and 1.0% of the loan amount on an annual basis. So on a $200,000 home we are talking about up to $2,000 per year in potential savings should you decide to refinance and lower your loan-to-equity ratio below 80%.
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One other key advantage to refinancing your home is the “grace period”. In most cases the company that you refinance your mortgage through grants a grace period before your new lower mortgage payments begin. This grace period could be a month or more, which can add to the overall cash flow benefit of refinancing.
When you combine the lower monthly mortgage payment with potential private mortgage insurance (PMI) savings and a possible grace period you have the makings for not only considerable monthly savings but also an immediate cash flow injection which could provide much needed help in reaching your financial goals for the year. Just something to consider as you look forward to the future.
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