Principal, interest, taxes & insurance are what encompass the elements of the PITI monthly payment. This is the acronym for a mortgage payment consisting of the Principal and Interest (loan servicing aspect), Taxes (as required per local regulations) & Insurance. In addition, when the LTV (Loan To Value) of your home loan exceeds 80% you will be required to have PMI (Private Mortgage Insurance). PITI is the typical full payment that you are looking to pay as a borrower (not including PMI).
When you own a home, sooner or later you might wonder if refinancing its mortgage will make sense. Since 2008, it has become more difficult, but refinancing still can come with benefits. Here is what you need to know about restructuring your housing payment.
If you have significantly improved your credit score, getting a new mortgage with a lower payment can help save money in the long run. Typically, aim for interest rate savings of at least 1 percent. Advertisements of low loan rates only apply to buyers with excellent credit scores, and lenders use a sliding scale to figure out the terms. Clients with scores lower than 620 usually won't qualify at all, and scores above 720 garner increasingly better interest rates.
When you have a loan with an adjustable rate, switching to a fixed mortgage can make sense. While they have greater interest charges, fixed-rate loans can provide stability and peace of mind. Since the refinanced loan won't adjust, apply only when rates are low to lock it in.
Some people refinance to have lower monthly mortgage payments. This strategy can work if you plan on staying in your home at least until the settlement costs have been negated. Others like to restructure to a shorter term. While this approach might increase payments, it can reduce the overall interest and lead to paying the mortgage off earlier. When you go this route, make sure that you have job security.
When you have two mortgages, you can consolidate them into one payment. However, to avoid mortgage insurance your loan-to-value proportion needs to be below 80 percent. You could also pay off the second loan. Most lenders won't let you refinance until at least one year after the closing date of the second mortgage.
Regardless of why you refinance or even if you are a first time home buyer, you will have to pay settlement costs or closing costs. Expect to pay about 3 to 6 percent. If you anticipate to save money it will take time. To determine the break-even point, refer to this handy amortization calculator. The result of the refinance should benefit your living situation. In any case, you should expect to stay in the home for at least five years.Next article: