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Eric McWhinnie
If you have an existing mortgage loan, you have the option to refinance it. You do this by securing a new home loan to pay off your original mortgage. But you may be wondering, why refinance if you already have a home loan? Read on for a guide to refinancing and why you might want to.
Why is it a good idea to refinance my mortgage?
It's a good idea to refinance your mortgage if doing so can help improve your finances. Refinancing could lower your interest rate. This can reduce borrowing costs. It could allow you to lower your monthly payment and provide more flexibility in your budget. It could also make it possible to tap into your home equity -- you might want to take cash out to finance home improvements, for example. Or it could help you change the terms of your current loan to one that's a better fit.
Four reasons to refinance your mortgage
Here are four of the best reasons to refinance your home loan.
1. Reduce your interest rate
A lower interest rate means more of your monthly payment goes toward paying off what you owe. Depending on the decisions you make on your repayment timeline, a lower rate can also reduce total interest costs, get you a lower monthly payment, or do both.
Refinancing rates are high right now, so it's not a great time to refinance for a lower interest rate. The one exception might be if your initial rate was higher because your credit score was lower when you first borrowed -- if current rates are lower than your existing mortgage, it might make sense for you to refinance. It's a good idea to shop around with refinance lenders to get the best rates.
2. Change your payoff timeline
You can change your repayment schedule by refinancing.
If you have 20 years left on your mortgage, you could refinance to a 15-year loan. A shorter repayment time could raise your monthly payment -- sometimes even if you reduce your interest rate. But it could substantially reduce your total payment costs.
You could also refinance to a loan that has a longer repayment timeline. With this strategy, you might save money on your monthly payments, even if you don't drop your rate much. But doing this could make total loan costs higher -- even if your rate is lower -- because you'd pay interest for longer.
A mortgage calculator can help you understand how the payoff timeline and interest rate affect your monthly costs and total costs over time.
3. Change your loan type
If you have an adjustable-rate mortgage, you may decide to refinance to a fixed-rate loan. That way, you won't have to worry about rates and payments rising in the future. Or if you have an FHA loan and are paying mortgage insurance, you may refinance to a conventional loan to eliminate mortgage insurance costs.
4. Tap into your home equity
If you have a lot of equity (ownership) in your home, you may want to use some of that money for other things. A cash-out refinance loan is one way to do that.
Here's how a cash-out refinance works: Let's say you have a mortgage for $100,000. You might refinance to a new mortgage of $150,000. Then, the lender will give you the extra $50,000 in cash. You can use this for home improvement projects, paying off credit card debt, or anything else you'd like.
This is an alternative to a home equity loan or home equity line of credit (HELOC). Cash-out refi loans can come with lower fixed interest rates than home equity loans, while HELOCs often have variable rates. And while home equity loans are tax deductible only if you use the money to buy, build, or improve your home, your refinance loan is deductible if you itemize on your tax return.
Still have questions?
Here are some other questions we've answered:
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The Ascent's best mortgage refinance lenders
Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings. Our experts have reviewed the most popular mortgage refinance companies to find the best options. Some of our experts have even used these lenders themselves to cut their costs.
FAQs
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One traditional rule of thumb advises you to refinance when you can reduce your mortgage interest rate by 1%. However, this is a very simplistic approach. In general, you should refinance if doing so will save you enough money to cover the costs of refinancing in a reasonable time. If you don't expect to move or refinance again before you cover the closing costs, you can benefit by securing a mortgage refinance loan.
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Yes. Refinancing your mortgage loan comes with closing costs, much like when you got your original home loan. They could amount to 2% to 6% of the amount you're borrowing, and they include application fees, appraisal costs, and more. It's best to shop around with different refinance lenders to find the best deal without extra fees.
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Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.
Ashley Maready is a former history museum professional who made the leap to digital content writing and editing in 2021. She has a BA in History and Philosophy from Hood College and an MA in Applied History from Shippensburg University. Ashley loves creating content for the public and learning new things so she can teach others, whether it's information about salt mining, canal mules, or personal finance.
Fact Checked
Eric McWhinnie
Eric McWhinnie has been writing and editing digital content since 2010. He specializes in personal finance and investing. He also holds a bachelor’s degree in Finance.
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