Refinancing Tips for Millennials

Experienced homeowners understand the benefits of refinancing their mortgage from time to time. Newbies might need some advice about when – and why – refinancing makes sense.

With that in mind, here are four smart refinancing tips for millennials, today's newest generation of homeowners.

1. Refinancing Can Be Smart Even if You Recently Purchased Your Home

Refinancing isn't free, but it can help you save money and get a home loan that better fits your needs:

Potential benefits include:

  • Lower rate
  • Lower payment
  • Fixed instead of adjustable rate
  • Shorter repayment term
  • Longer repayment term
  • Removal of mortgage insurance

With a lower rate, you could save money by paying less interest over the life of your loan.

With a lower payment, you could take the pressure off your household budget by reducing your monthly housing cost.

With a fixed rate, you could sleep better at night, knowing you're not exposed to interest rate fluctuations.

With a shorter or longer repayment term, you could plan to pay off your mortgage sooner or better manage your monthly housing expense.

Without mortgage insurance, you could eliminate a monthly expenditure that protects your lender.

Refinancing might be especially attractive if your credit has improved, you've paid off your student loans or other debt, or your home has appreciated in value.

You don't have to be a longtime homeowner for the benefits of refinancing to work in your favor.

2. You Don't Need a Lot of Equity to Refinance

Some homeowners think they need at least 20 percent equity in their home to refinance. In fact, it's possible to refinance with much less equity or even none at all.

To calculate your equity percentage, subtract your loan balance from your home's market value and divide the result by the value.

Here's an example:

Mortgage balance: $280,000

Home value: $320,000

Equity percentage:

$320,000 - $280,000 = $40,000

$40,000 / $320,000 = .125 or 12.5 percent

If you refinance with low or no equity, you might have to pay for mortgage insurance and you probably won't be able to get cash out; however, the other benefits might still make refinancing worthwhile for you.

3. You Don't Have to Pay a Lot of Fees to Refinance

Refinancing doesn't have to involve steep out-of-pocket costs.

Depending on the type of loan you choose, you might be able to add your costs to your loan amount or accept a higher interest rate for a no-cost refinancing. If refinancing makes sense for you, a larger loan or higher rate could enable you to advantage of the opportunity without having to pay a lot of upfront fees.

4. You Might Be Able to Refinance with Limited Paperwork and No Appraisal

Some loan programs allow current borrowers to refinance with limited paperwork and no appraisal requirement. Two examples are the FHA loan, insured by the Federal Housing Administration, and VA loan, guaranteed by the U.S. Department of Veterans Affairs. These easy rate-and-term refinancings are known as a streamline refinance. You won't be able to extract cash in a streamline refinance, but you might be able to reduce your payment.

Altogether, these refinancing tips for millennials can mean big savings for homeowners in this generation.

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