Refinancing your mortgage is a great way to access your home equity or change the financial circumstances around your mortgage. It can be a powerful weapon for a homeowner who's kept up with their mortgage payments.
In fact, you might not even have to leave your house or pick up a phone to complete the entire refinancing process! Some of our favorite mortgage companies that offer refinance loans have streamlined the process, and you might be able to refinance your mortgage entirely online.
Here are a few reasons you may want to refinance your mortgage.
Reduce your monthly mortgage payment
If you're 10 years into a 30-year mortgage loan, you can refinance the remaining amount to spread those 20 years of payments across a 30-year loan term, lowering your monthly payment. (If you do this, you'll increase the total amount of interest you pay.) Check out our mortgage calculator to see how much you might pay.
Lock in a lower interest rate
Mortgage interest rates have risen over the past few years, so many homeowners won't be able to lower their interest rate by refinancing. But if you can get a new mortgage with a lower interest rate (usually a half percentage point or more), it can make good financial sense to refinance. Even a seemingly small change can make a big difference.
For example, you'll pay $47,880 more with a 7% rate than a 6.5% interest rate on a $400,000 30-year mortgage over the term of the loan. It's also worth noting that even if market interest rates haven't moved much, you may be able to get a lower rate if your credit score has improved significantly since you got your current mortgage.
Convert an adjustable-rate mortgage (or ARM) to a fixed-rate mortgage
Adjustable-rate mortgages are interest-rate sensitive, so they can start to get pretty expensive if interest rates increase after you close on your loan. A refinance is a great opportunity to lock in a fixed-rate mortgage for the remainder of your home loan, and can be an especially good idea when interest rates fall.
Get rid of mortgage insurance
If you originally put less than 20% down or used an FHA loan, you probably had to add mortgage insurance to your loan. If your home is now worth significantly more than you paid for it, or if you've paid down a considerable portion of your loan balance, refinancing could allow you to drop mortgage insurance and lower your payment, even if interest rates haven't fallen much.
Tap home equity to pay for a large project (like an addition or a remodel)
A refinance isn't the only way to get funds for a home improvement project. But it's a way to borrow against your home equity and still end up with just one monthly payment. In contrast, a home equity line of credit (or second mortgage) would leave you with two separate payments.)
If you have sufficient equity in your home, a cash-out refi lets you borrow enough to pay off your current mortgage, plus extra. You then get money back from the lender and could use it pretty much any way you like.
Make sure you're refinancing with one of the best refinancing lenders not just because you can, but because you need it to achieve your financial goals.
