Mortgage refinancing is a popular topic right now. It seems everywhere you turn, there’s talk about refinancing. Whether it’s through the news, social media, or family and friends, chances are you’ve heard, and even thought about, refinancing your mortgage. But is it a good idea?
Sure, interest rates are low, but that’s not the only reason to refinance your mortgage. To help you determine if it’s the right move for you and your family, we’ll walk you through the most common reasons to refinance your mortgage.
Lowering your interest rate is probably the most common reason to refinance your mortgage. Lowering your interest rate can reduce your payment, so you’ll have more room in your monthly budget. Additionally, if you don’t reset your mortgage’s length, you’ll pay less interest over the life of the loan with the lower rate.
Of course, you should consider closing costs and other associated fees to ensure a refinance makes sense overall. A lower interest rate can reduce your monthly payment and interest but still end up costing you more after the expenses are factored in. We recommend doing a break-even analysis, and one of our mortgage banking experts, Tim Allen, will show you how in this helpful video.
Another reason to refinance is to change the terms or length of your mortgage. By shortening your loan duration from a 30-year mortgage to a 10, 15, or 20-year mortgage, you may lower your interest rate and pay less cumulative interest over the life of the loan. You’ll also pay the loan off quicker. However, it’s important to note that your monthly payments will go up when you reduce the duration of your loan.
Conversely, if you currently have a shorter-term mortgage, you can usually lower your monthly payment by refinancing into a longer-term loan. It’s important to note that we say “usually” here because your interest rate may go up when borrowing for a longer period.
If you are paying private mortgage insurance (PMI) with your current mortgage, you might be able to refinance into a conventional loan that doesn’t require it. To do so, lenders usually require a loan-to-value ratio of 80%, which likely means you have either paid the down the loan’s balance by 20% or your home’s value has risen to the point that your existing balance represents 80% of today’s appraised value.
Another reason to refinance is to switch from an adjustable rate mortgage (ARM) to a conventional mortgage. An ARM usually starts with a low interest rate for an initial fixed period, but it later fluctuates with market conditions. When interest rates are low, or you only plan to be in your home for a few years, an ARM can be beneficial.
But when interest rates rise, so too will your interest rate and corresponding monthly payment. Therefore, if you have an ARM and want to switch to a stable or fixed-rate mortgage, refinancing is the way to do it.
You might also want to refinance your mortgage if you have a significant amount of equity in your home and want to pull some of the money out. Doing this replaces your current home loan with a new mortgage with a higher balance than your existing loan. Popular reasons to do a cash-out refinance include home improvement, buying another property, consolidating high-interest debt, or paying for college.
If you’re interested in this option, the first step is understanding the value of your home versus your loan balance.
The final reason that many homeowners refinance is to pay off property-related debt at a lower interest rate. Specifically, suppose you have a second mortgage, home equity line of credit, or property liens. Each will have its own associated terms, interest rates, and recurring costs. You can usually save money by refinancing and combining the other debt payments into a single home mortgage payment, which can reduce overall costs and provide tax advantages.
There are many different reasons to refinance. And as we mentioned above, it’s always essential to perform a break-even analysis to make sure you’re aware of the actual costs associated with refinancing. In other words, there’s more to consider than a lower monthly payment.
If you decide you want to refinance your mortgage, reach out to your current loan originator or servicer first. In most cases, they can give you the best interest rate and make the process much easier than going with a new lender.
Your original lender or loan servicer will know your payment history and other critical information, so the paperwork process is streamlined. They also can leverage discounts or special rates, especially if you have excellent credit and a record of on-time payments. Finally, they can sometimes even reduce your closing costs, so be sure to call your current loan servicer or lender when you want to refinance your mortgage.
If you’re interested in learning the value of your home or what it’s currently worth, use our fast and free home value estimator.