5 Reasons to Refinance Your Home
While many homeowners may not think much about their mortgage after making the initial purchase, it’s important to assess your mortgage annually to make sure that you’re getting the most out of your loan. Occasionally, it can be beneficial to refinance your home loan to take advantage of lower interest rates and more favorable terms.
What Is Refinancing?
Refinancing refers to the process of revising or replacing the existing loan or mortgage on your house. When you choose to refinance your home, your mortgage lender will pay your balance and replace it with a new one that has a new interest rate and/or a different term.
Why Refinance Your House?
Though refinancing may not benefit every homeowner, it can be worth it in specific situations. Here are the top five reasons you may consider refinancing your home.
1. Lower Your Interest Rate
The interest rate on your mortgage is the amount that your lender charges you for your debt, expressed as a percentage of the principal amount. The higher the interest rate, the more you pay each month to your lender. The interest rate you qualify for depends on various factors, including your credit score, your debt-to-income ratio, and the overall market conditions. If your financial position changes or market trends shift (e.g., to a low-interest market like we are currently experiencing), you could refinance your home to reduce your interest rate. This means that you’ll pay less each month, and over the course of your loan term.
2. Shorten Your Loan's Term
When you take out a mortgage, the length of time it takes you to pay it off is known as your loan term. Today, most homeowners qualify for a 30-year fixed-rate mortgage, meaning debt payments are stretched out over the course of 30 years. The longer your loan term, the lower your monthly payment. However, the longer your term, the more expensive it can be, as a longer-term loan has a higher interest rate and a higher total interest cost. If you can afford higher monthly payments, you can refinance to shorten your loan term. Although it can be more costly in the near term, you can save money in the long-term and pay off your mortgage more quickly.
3. Lower Your Monthly Payment
Life happens, and sometimes we’re faced with economic challenges. Even during these times, as a homeowner, you’re responsible for paying your mortgage. If you seek to lower your monthly expenses, you could consider refinancing your home to decrease your monthly payments.
Occasionally, merely refinancing to a lower interest rate helps you reduce your monthly payments. However, if you already have a low-interest mortgage, you can refinance to extend your loan's term. This spreads your payments over a more extended period and reduces your monthly expenses. Remember, though, when you extend your loan term, you commit to paying more in interest over the long run. Therefore, this should be considered a short-term solution with longer-term implications.
4. Convert to a Fixed-Rate Mortgage
If you’re buying a home, you can choose from two primary mortgage types: adjustable-rate and fixed-rate. An adjustable-rate mortgage (ARM) has an interest rate that fluctuates with market conditions, while a fixed-rate mortgage has a fixed interest rate, meaning the rate doesn’t change during the term of the loan, and neither does the monthly payment amount.
Most mortgages qualify for a fixed-rate, but occasionally, you may prefer an adjustable-rate because it offers a lower initial interest rate, which means a lower monthly payment. However, as market conditions shift, ARM rates increase, sometimes surpassing the going rate of a fixed-rate loan. ARMs, in the long run, tend to be more costly compared to fixed-rate mortgages and can be more unpredictable since they vary depending on market fluctuations. With an ARM, you can refinance to a fixed-rate to provide a more stable long-term solution for your mortgage.
However, if interest rates are low and you’re planning to sell your home in the near future, you can do the opposite—switch from a fixed-rate mortgage to an ARM. Although this raises concern over interest rate hikes, it tends to offer an immediately lower interest rate, which results in lower monthly payments in the short-term.
5. Pull Out Cash via a Cash-Out Refi
If you’re a homeowner, you can also refinance your home and pull equity from it—in other words, you can take out more debt to gain access to cash. This is known as a cash-out refi and can provide you with access to the immediate capital needed for another project. However, in this instance, it may be best to refinance only if the equity pulled is used to increase your home's value or to improve your financial position. For example, a cash-out refi is a great option if you need capital to make home improvements, remodel, or purchase a second investment property.
In some cases, a cash-out refi can also help you consolidate debt. Leveraging your home allows you to take out a loan with a lower interest rate compared to other forms of debt. However, a cash-out refi is not typically recommended if the cash is being used for unnecessary purchases. When you add to your debt, you’re putting your home on the line. Therefore, you may want to rely on this option only if you’re confident that you can afford the higher or longer-term payments incurred by the refinance.
How to Refinance Your Home
If you’re interested in learning more about refinancing your home, speak to a professional first. You can visit our Mortgage Center online for resources about everything mortgage-related, from refinancing your home to closing on your mortgage quickly.
As your trusted partner, we’re here to guide you through every step of your financial journey. Our experts are here to help you understand how a refinance might improve your financial position and empower you to achieve your financial goals!