Many homeowners wonder if, and when, they should refinance
their mortgages. But how exactly do you know when to refinance?
Here’s a quick look at some of the most popular reasons to refinance a home:
- To take advantage of lower interest rates. Interest rates fluctuate over time, so if you locked in your interest rate 5 or 10 years ago, there’s a good chance you could get a lower rate with a new mortgage. With a lower interest rate, you could end up saving thousands of dollars over the life of the loan. Many lending experts suggest making the refinancing move if the new interest rate would be at least 1% to 2% percent lower than your current rate. A reduced interest rate will not only save you money in the long run, but it will lower your monthly mortgage payment as well.
- To pay off your mortgage faster. If you have a 30-year fixed-rate mortgage, you could potentially take advantage of lower interest rates by refinancing to a 15-year fixed rate mortgage. Likewise, if you have a 15-year fixed-rate mortgage, you might consider refinancing to a 10-year fixed rate mortgage. While your monthly mortgage payments will generally be higher with a shorter-term mortgage, paying off your home faster can save you thousands of dollars in interest in the long run. And, the faster you pay down your mortgage, the faster you’ll build equity in your home.
- To replace an adjustable-rate mortgage (ARM) with a fixed-rate mortgage. With an adjustable-rate mortgage, the interest rate varies throughout the life of the loan. Say, for instance, you obtain a 5/1 ARM. This means that the interest rate will be fixed for the first five years, and after that, the rate will adjust once every year for the remainder of the loan. At the outset, ARMs often have lower interest rates than fixed-rate mortgages. But that can change over time, as the interest rate adjustments kick in. The resulting rate hikes can be a huge motivator for homeowners who want to refinance their ARMs to a lower-rate, fixed-rate loan.
- To consolidate debt. Refinancing to a lower interest rate can give homeowners the opportunity to consolidate debt amassed by credit cards, auto loans, and other borrowings. This can be done through a cash-out refinance. With this type of refinance, you replace your existing mortgage with a new one that is larger than what you currently owe on the home. The difference between the new loan amount and your existing mortgage balance is then distributed to you in cash, and you can use that cash to pay down existing debt.
- To get cash for large purchases. A cash-out refinance can also be used to obtain the cash necessary for home improvements, college expenses, or other large-scale expenses.
If you’re thinking about refinancing, it’s a good idea to speak with a mortgage professional
who can help you assess your current financial situation and goals, and determine the financing option that best suits your needs. No matter what your reasons are for refinancing, we’re here to help!