4 Great Reasons to Refinance Your Mortgage

Here are some worthwhile reasons to take advantage of today's low interest rates.

You may be tempted by today's low interest rates to refinance your mortgage. If you're unsure if refinancing is for you, here are four strong reasons why you should consider doing so.

1. If you can lower your payment

If 2020 hit your bank account hard, you may be interested in refinancing your mortgage to lower the monthly payment. Refinancing can decrease your mortgage payment by:

• Lowering your interest rate
• Extending the length of your loan
• Letting you drop private mortgage insurance

Let's say you took out a $350,000 mortgage five years ago. Your credit score was so-so and the interest rate on your loan was 6.99%. Today, you have a remaining balance around $298,000. Here is the breakdown of your current payment (principal and interest only):

But five years later, you're in better shape financially. Maybe your income has remained steady, but you've had time to build a strong credit score and can now get a lower interest rate. You qualify for an APR of 3.25% and decide to stick to your remaining loan term of 25 years. This is what refinancing today would look like:

By refinancing, you save $853 per month. If you wanted to drop your payment even more, you could refinance to a 30-year mortgage rather than finish paying the loan off in 25 years. Here's how that would look:

Extending the term would drop your house payment another $158 per month, but it's important to weigh whether extending it is the best thing to do. If you pay the loan off in 25 years, you'll spend about $140,000 in interest. By taking an extra five years, you'll pay more than $171,000 in interest. That's a whopping $31,000 more.

2. When you can afford to shorten the loan term

Let's say you're in your 40s and don't want a mortgage in your 70s. Two years ago, you took out a mortgage for $280,000 with a 3.5% interest rate. Principal and interest will run you $1,258 per month. By the time the loan is paid off in 30 years, you will pay nearly $173,000 in interest.

Now, imagine two years in to your mortgage, you refinance the remaining balance for 15 years instead. Adding in closing costs, your new mortgage comes to $275,000. Your monthly payment increases by about $700, but you save more than $93,000 in interest.

3. When you can convert from an adjustable rate to a fixed rate

If you opted for an adjustable-rate mortgage when you bought your home, it was likely because the fixed rate was higher than the starting adjustable rate. When you take out an adjustable-rate mortgage, the interest rate is fixed for a set period of time. It "resets" at regular intervals, based on specific economic indexes. You're never sure if your mortgage payment will increase or decrease during the next reset period. Refinance rates are very low right now. So refinancing into a fixed-rate mortgage might get you a lower rate -- one that stays the same every month for the rest of the loan term. And that consistency alone may make refinancing your mortgage worthwhile.

4. When you can refinance for free or at a low cost

If you refinance your mortgage, you'll also have to think about closing costs. And the truth is that closing costs are all over the place. Typically, these fees are 2% to 6% of the amount refinanced. But in an effort to get your business, many of the best mortgage lenders offer refinancing with no (or very low) closing costs. Just as you would shop around for a great interest rate, ask about closing costs before settling on a lender. There's no reason to pay more than you have to when you refinance your loan.

Any time refinancing your property can save you money and give you a greater sense of financial security, you know it's the right thing to do.