Many home buyers have the misconception that they don’t have to worry about refinancing till later into their homeownership journey. Here’s why you should start thinking about refinancing BEFORE you buy a home.
What is Refinancing (Refi)
To refi your mortgage would be to replace your current loan with a new one with different terms. What changes between the first and second loan is how much home equity you would have built up, and hopefully your mortgage rates. Note that you don’t have to change lenders to refi your property, especially if they’re providing you the better rates you’re looking for and you’ve been having a good experience with them!
Upon refi, you will have to pay many of the closing costs that you paid upon first purchase, including loan origination fees and title fees. Therefore, you would want to do the math on how long it would take for you to break even on closing costs over your (hopefully) cheaper rates, and if you plan on staying long enough to reap the benefits of the refi.
Lower monthly payments are the biggest reason you’d probably want to refi. These usually come from 2 aspects of your payments.
The lower rates are the more obvious one but are very market dependent (how the mortgage rates are in the market that day). It definitely helps to stay vigilant about market trends and jump on the chance of cheaper mortgage rates if your breakeven point after including closing costs makes sense for you.
The other factor that you might not realize is not having to pay for Private Mortgage Insurance (PMI). If you’ve managed to build enough equity in your home (usually >20%) when you’re thinking of refinancing, you might be able to save hundreds of dollars every month in your monthly payments because you’d no longer have to pay for PMI.
The reason we insist that you understand refinancing before you begin the home buying process is that it opens up more doors for you.
If you only think of refinancing as a problem for the future, you might be closing yourself off to opportunities for homeownership. Since you now understand that through refi, you might be able to save on monthly payments even through no longer having to pay for PMI, you can now budget better.
Running the numbers on how long it would take for you to build up enough equity in your home based on your initial downpayment and your loan terms, and then evaluating how far you might be able to stretch your budget before you can eliminate hundreds of dollars in PMI might be worth it, especially if it allows you to more seriously consider low-downpayment loans like FHA and VA loans.
When you understand that PMI isn’t something you’re stuck with for your entire loan terms because of refinancing as an option, the entire dynamics change for you when buying a home. Consider your options well and we wish you luck in your search!