6 Reasons Why You Should Consider Refinancing Your Home

With mortgage rates low and home equity levels up, refinancing has been a popular activity among homeowners these past few years. Is it something you should do, too? Here are six reasons you might want to refinance your mortgage this year.

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Mortgage rates hit an all-time low this year, bottoming out at just 2.65% in January. For homeowners who took out their mortgage just two years before, that marked a whopping 180 basis point drop (the average rate two years prior was 4.45%). On a $200,000 mortgage, that’s the difference between a $1,007 monthly payment and an $805 one. Even more telling are the long-term interest costs, which come in at $162,677 versus $90,133 -- a savings of over $72,000.

While rates have increased a bit since that record-setting time, they’re still quite low, historically speaking. Chances are, if you got your mortgage at least a few years ago, you stand to save a pretty penny by refinancing at today’s rates.

ALSO READ: 30-Year Mortgage Rates Might Average 4% Next Year -- but Is That a Bad Thing?

Need to free up some cash? There are several ways refinancing can lower your monthly payment and help. First, it can allow you to get a lower interest rate -- and the lower your interest rate, the lower your payment.

You can also change your loan term when refinancing. By refinancing into a longer-term loan, you spread your balance out over more months, lowering your payment in the process.

Finally, if you’ve been in the home long enough, refinancing might allow you to drop mortgage insurance. This depends on your exact mortgage type and how much equity you have in the home.

Adjustable-rate mortgages fluctuate over time. At a certain point, your rate and monthly payment will either increase or decrease based on the market they’re tied to. If you’re nearing the point where your loan’s going to adjust, refinancing can help you avoid that adjustment -- and any sudden increases in payment it might come with. You’d either: 1) refinance into a fixed-rate loan and get a more consistent, reliable payment moving forward, or 2) opt for another adjustable loan but start the clock over on your rate adjustments. Either way, you’re avoiding that potential rate hike in the here and now.

ALSO READ: 3 Benefits and 1 Big Downside of Adjustable-Rate Mortgages

If you’ve just gotten a raise or simply want to get rid of that looming debt faster, refinancing can help there, too. To accomplish this, you’d refinance into a shorter-term loan than what you currently have -- maybe a 10- or 15-year mortgage -- and then pay the loan off on a tighter timeline. Keep in mind: This will mean a higher monthly payment, so make sure you budget accordingly.

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With a cash-out refinance, you can turn your home equity -- or the stake in the home you actually own -- into cash. Here’s how it works: You refinance into a larger-balance loan than you currently have, use those funds to pay off your old loan, and then keep the remaining balance in cash. You can then use that money to cover whatever expenses you’re dealing with -- home repairs, college tuition, medical bills, etc.

ALSO READ: Should You Do a Cash-Out Refinance in 2022?

Cash-out refinancing can also be a great debt consolidation tool. Because mortgage loans typically have much lower rates than credit cards, personal loans, and auto loans, refinancing can actually save you tons on interest in the long haul. You’d simply use the funds from a cash-out refinance to pay off those higher-interest debts, essentially rolling them into your new mortgage balance. You’d then pay off that balance monthly over many years (and at a much lower rate than your cards and other loans likely had).

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Refinancing your mortgage can help you achieve any number of financial goals -- from paying off debts or renovating your house to reducing your payment and freeing up more monthly cash flow. If you’re not sure if refinancing is the right move for your household, consider talking to a mortgage broker or financial advisor. They can point you in the right direction.

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