When you refinance your mortgage, you’re replacing it with a new loan under different terms. Since interest rates recently dropped to record lows, it’s a great time to consider this option! So, what are the ways you might benefit from refinancing? Check out the top reasons below.
1. Lower Your Interest Rate and Monthly Payment
One of the most common reasons to refinance a mortgage is to lower your interest rate and, consequently, your monthly mortgage payment. As mentioned, rates recently fell to historic lows, and refinancing has been popular with homeowners this year. The higher your current rate is above your new rate and the longer you plan to keep your mortgage, the bigger your potential savings. By refinancing to a lower rate and monthly payment, you may be able to save hundreds of dollars a year or more on your mortgage payment.
2. Convert to a Fixed-Rate Mortgage
If you opted for an adjustable-rate mortgage (ARM) for your current loan, you may be able to reap the benefits of a fixed-rate mortgage when you refinance. With an ARM, your interest rate is fixed for an initial period but then fluctuates based on an interest rate index. This means there will always be the risk that rates – and your monthly payment – could go up in the future. When you refinance to a fixed-rate mortgage, you get the assurance that your monthly principal and interest payment will stay the same for the life of your loan.
3. Remove the Cost of Mortgage Insurance
If you buy a home with less than 20% down or refinance with less than 20% equity, you will usually have to pay a monthly mortgage insurance (MI) premium. Mortgage insurance on non-government loans is known as private mortgage insurance (PMI) and can be removed without refinancing when certain conditions are met. If you qualify, a mortgage refinance may be a way to remove PMI early or a way to remove MI from a government loan, lowering your monthly costs.
4. Take Cash Out to Spend on Anything
Opting for a cash-out refinance allows you to replace your current mortgage with one that borrows more than what you currently owe. The difference is given to you in cash after closing to spend on whatever you please. You can use this money for a home renovation, education expenses, debt consolidation or anything else.
5. Adjust the Length of Your Loan
If you’re thinking of refinancing for any of the reasons above, you may also want to shorten or extend the length of your loan, known as your loan term. For example, if you have 20 years left on a 30-year loan, you may want to refinance into a 15-year loan. That way, you’ll be scheduled to pay off your loan sooner and accrue less interest, and you’ll probably qualify for a lower interest rate than with a comparable longer-term loan. Refinancing into a shorter term typically increases your monthly payment since you’ll have fewer payments scheduled, whereas going with a longer term usually shrinks your payment since you’ll have more planned payments.
As with any financial decision, make sure you consider all your options, weigh the benefits and costs and talk to a mortgage professional. Get in touch today to find out if you could benefit from a mortgage refinance!