8 Scenarios Where Mortgage Refinancing Makes Sense
8 Scenarios Where Mortgage Refinancing Makes Sense
Should you refinance?
When you refinance your mortgage, you swap your existing home loan for a new one -- a loan with terms that work better for you. Refinancing has its benefits, but it's not right for everyone. In these scenarios, however, it generally makes sense.
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1. Rates are down
The lower the interest rate on your mortgage, the less that loan costs you each month. As such, when rates drop substantially across the board, it could pay to refinance. Generally, your goal should be to drop your interest rate by about 1%, or somewhere close.
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2. Your credit score has improved since you signed your original loan
The interest rate you're given on your mortgage will hinge on a number of factors, and your credit score is one of them. If that number has improved significantly since you signed your home loan, then it could pay to refinance, because chances are, you'll be eligible for a much more favorable rate.
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3. You have an adjustable rate mortgage
With an adjustable rate mortgage, you're guaranteed to pay the same interest rate for a preset period of time, after which your rate has the potential to adjust upward. Refinancing to a fixed-rate loan before your adjustable rate mortgage climbs could therefore spare you from having a higher monthly payment on your hands.
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4. You want to take cash out of your home
With a traditional refinance, you exchange your existing mortgage for a new one with the same balance. With a cash-out refinance, you borrow more than your existing loan balance and get the remainder in check form. You can then use that money as you see fit. A cash-out refinance can be a fairly cheap way to borrow, because rather than pay a higher interest rate on a credit card or personal loan, you can instead take cash out of your mortgage and pay it back at a relatively low rate.
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As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.
But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases until late 2021, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.
That’s why our expert – who has reviewed hundreds of cards – signed up for this one personally. Click here to get free access to our expert’s top pick.
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5. You want to lower your monthly payments by extending your loan
The benefit of signing a 15-year mortgage is locking in a lower interest rate than what you'll get with a longer loan term, and also, saving money on interest throughout your repayment period. But if you're having trouble keeping up with your 15-year loan, refinancing to a 30-year loan could make your payments far more affordable. Though you may see your interest rate climb, you'll stretch out your repayment period so you're paying your lender less each month.
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6. You want to shorten your loan term
You may want your home paid off in time to meet a certain milestone, like retirement. Refinancing from a longer loan term to a shorter one -- say, going from a 30-year mortgage to a 15-year loan -- could help you achieve that goal.
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7. You're not planning to move anytime soon
When you refinance a mortgage, you pay closing costs that eat into your savings. But if you'll be in your home long enough to make up for them, then refinancing could easily pay off. For example, you might get charged $4,000 in closing costs to refinance, which then lowers your monthly payments by $200 apiece. But all it takes in this scenario is for you to stay in your home for 20 months to break even, so if you intend to remain where you are for a while, refinancing is a move worth making.
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8. You’re offered really low closing costs
Some lenders are able to keep their closing costs to a minimum. If you get such an offer, it could pay to refinance even if the interest rate on your loan doesn't drop by about 1%. For example, if you're charged $2,000 in closing costs and that saves you $50 a month, you'll break even in 40 months, so if you plan to be in your home beyond that point, you'll come out ahead financially. And while $50 may not seem like a huge amount of monthly savings, it's better than nothing.
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As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.
But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases until late 2021, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.
That’s why our expert – who has reviewed hundreds of cards – signed up for this one personally. Click here to get free access to our expert’s top pick.
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Make the right call
A lot of borrowers are refinancing these days as interest rates remain competitive. If any of these scenarios apply to you, you might really benefit from following in their footsteps.
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