What are the risks of refinancing?

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asked Jun 7, 2023 in Real Estate - Renting by dave123321 (1,220 points)
What are the risks of refinancing?

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answered Jun 7, 2023 by cabbagehead (13,690 points)
The risks of refinancing are you may not be able to replace a debt obligation with suitable new debt at a critical point and other factors that are beyond your control like shrinking credit market and rising interest rates that can play a role in your ability to refinance.

Other risks of refinancing are.

You Might Not Break Even.
The Savings Might Not Be Worth The Effort.
Your Monthly Payment Could Increase.
You Could Reduce The Equity In Your Home.

You can sell your house after refinancing immediately or soon or anytime after refinancing, unless the mortgage contract has an owner occupancy clause.

The owner occupancy clause means that you agree to live in the house as a primary residence for an established period of time.

PMI does not always start over when you refinance and refinancing your mortgage can get rid of PMI but your new mortgage balance must be 80 percent of your home's appraised value or lower.

And if you take out a conventional mortgage and you put less than 20 percent down then your mortgage lender will most often add PMI to your monthly payment.

If interest rates have dropped since securing your current mortgage, then refinancing could save you money.

In addition to fetching a lower rate, a mortgage refinance may get rid of PMI when your new mortgage balance is less than 80% of the home value.

You can rid of your PMI or private mortgage insurance by making extra payments towards the principal of the mortgage or also by doing any of the following.

Wait until you qualify for automatic or final termination of PMI.
Request PMI cancellation when mortgage balance reaches 80% .
Pay down your mortgage earlier.
Refinance your mortgage.
Reappraise your home.
Expand or renovate your home to increase its value.

Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay for if you have a conventional loan.

Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan.

If you're current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original appraised value of your home.

If you choose to use PMI, be sure to talk with your lender about these specific details of your policy.

Home buyers who put at least 20% down don't have to pay PMI, and they'll save on interest over the life of the loan.

Putting 20% down is likely not in your best interest if it would leave you in a compromised financial position with no financial cushion.

To avoid PMI for most loans, you'll need at least 20 percent of the home's purchase price set aside for a down payment.

For example, if you're buying a home for $250,000.00, you need to be able to put down $50,000.00

To get rid of PMI on mortgage.

Wait until you qualify for automatic or final termination of PMI.
Request PMI cancellation when mortgage balance reaches 80% .
Pay down your mortgage earlier.
Refinance your mortgage.
Reappraise your home.
Expand or renovate your home to increase its value.

The PMI which stands for Private Mortgage Insurance must be kept on your mortgage and you have to continue paying the PMI for a period of 2 years or until your home has built up at least 25% equity which usually occurs within 2 to 5 years.

After 5 years of holding the home mortgage you only require 20% equity in your home to be able to stop paying Private Mortgage Insurance.

So expect to have to pay PMI or Private Mortgage Insurance for up to 5 years in most cases.

Some lenders offer 40 year home mortgages so you could refinance your mortgage to a 40 year mortgage from a 30 year mortgage in some cases but it would just take you longer to pay off the mortgage.

If you have a 15 year mortgage with higher payments you could refinance to a 30 year mortgage which would lower your monthly mortgage payments but increase the interest you pay and cause you to take longer to pay off the mortgage.

You can get rid of your PMI also or make extra payments towards the principal of the mortgage.

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