The 5 Best Reasons To Refinance Your Mortgage
When you refinance your home loan, you’re exchanging your current mortgage for a new one, typically with different loan terms. These new terms could help make your mortgage more manageable or save you money in the long run.
You might look at refinancing for a variety of reasons, but up next are the five most common reasons to refinance.
1. To Lower Your Mortgage Interest Rate
Borrowers may choose to refinance their mortgage to take advantage of low mortgage interest rates, especially if rates are lower than when the borrower initially took out the loan. Your interest rate impacts the size of your monthly mortgage payment and how much you’ll pay throughout your loan term. The higher your rate, the bigger your monthly payment will be and the more you’ll eventually shell out in interest.
So, refinancing to a lower interest rate can help decrease your monthly payment and save you money long term. Plus, it can help you build equity in your home at a faster rate. Your equity increases when you pay down the principal balance on your mortgage. If you’re paying more toward your principal every month (because you don’t have to pay as much in interest), you’re building your home equity more quickly.
2. To Change Your Loan Term
If interest rates are very low, borrowers may have the option to refinance to a mortgage with a shorter loan term without drastically changing the amount of their monthly payment. But even if this isn’t the case, you may still want to refinance to change the length of time you have to pay off your loan. Let’s see what happens when you shorten or lengthen your mortgage term.
Shorten The Loan Term
Refinancing to a mortgage with a shorter term (for instance, switching from a 30-year mortgage to a 15-year mortgage) can help you pay off your mortgage early, meaning you’ll own your house sooner and can free up funds for other financial goals. Paying back your loan over a shorter term can also help you save money on interest over the duration of the loan.
On the downside, switching to a shorter-term loan often increases your monthly payment amount. If you have trouble making your mortgage payments as is, shortening the loan term may not be the best option.
Lengthen The Loan Term
It’s possible that you want to refinance to a mortgage with a longer term and lower monthly mortgage payments. Lengthening your loan term reduces how much money you pay each month because you’re stretching out the amount of time you have to pay back the loan.
Your monthly payments will be lower on a mortgage with a longer term, but you’ll end up paying more in interest over time. Plus, it’ll take you longer to fully own your property.
However, if you’re experiencing a financial pinch around your payments, it’s often better to be proactive in revising your terms in order to avoid foreclosure. Keep in mind that refinancing to lower monthly payments can also free up funds to pay off other debts, build up your savings account or invest.
3. To Access Your Home Equity
Refinancing with a cash-out refinance allows you to use the equity you’ve built in your home. Your equity equals your home’s current worth minus how much you still owe your lender. A cash-out refinance replaces your current mortgage with a higher loan amount than you previously owed on the house, and you take a percentage of your home equity as cash to use for consolidating debt, paying for home improvements, college, retirement, a savings fund or making another investment of your choosing.