Rate and Term refi’s are designed to take advantage of better interest rates, mortgage insurance reductions, changing your home loan to a different product (FHA to Conventional), or restructuring to a new term; i.e., going from a 30 year fixed to a 20 or 15 year mortgage, or refinancing out of an ARM to a fixed rate mortgage product. There are a lot of options available. One of the great things about a refi is that there are generally no out of pocket costs because closing costs can be rolled back into the loan utilizing your equity.
Equity is the difference between the appraised value of your home vs. the payoff on your current mortgage. If your home has increased in value, you have gained equity. This is basically theoretical money until you sell your home and someone agrees to pay the sales price or you refinance to take advantage of your increased equity. The sales price or proposed home value must be supported by the market value as verified by the appraiser. If you bought your home for $200,000 and put 5% down, you have a loan for $190,000, but you also have mortgage insurance (MI) until you reach at least an 80% Loan to Value (LTV). If your home value magically became $237,500 overnight, you now have 20% equity in your home and 80% (LTV). A more plausible scenario is that you purchase the same house for $200,000 but it was worth around $208,000 at the time of purchase and you pay down your mortgage for a few years while your home gradually appreciates. So several years later the market is great, your home has appreciated to around $220,000 and your mortgage payoff is $180,000. You now have 20% equity, or 80% LTV and can refinance out of your mortgage insurance and reduce your monthly payments with no MI and a smaller loan amortized over 30 years.
If you bought your home at a 6% interest rate and now interest rates are in the 4% range, refinancing will significantly reduce your mortgage payment.
If you have a 30 year mortgage but your family income situation has improved and you want to pay off your loan sooner but pay far less interest, you can refi into a lower term. 20 and 15 year mortgages are popular, but you can do just about any term you want. Keep in mind that you will pay less interest and more principle, but your payments will be a bit higher because you are amortized over fewer years. Still, if you can afford the payments, lower term mortgages can save you thousands of dollars over the life of the loan.
If you are in an FHA mortgage, you most likely have a loan with mortgage insurance that will never go away. Once you reach an 80% LTV by paying down the mortgage in relation to the current market value, you can refinance out of mortgage insurance into a conventional loan. If this is your goal, be sure to work on your credit score and your debt to income ratio while you pay down your mortgage so that once you reach that 80% LTV you will qualify for a conventional product.
There are a lot of reasons to refi your home and I’d be happy to go over your specific scenario.