Key Reasons to Refinance your Mortgage
Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many reasons as to why most homeowners refinance.
Since refinancing can cost between 3% and 6% of a loan’s principal and—as with most cases require an appraisal, title search, and application fees, it’s important for a homeowner to determine whether refinancing is a wise financial decision.
Refinancing to Secure a Lower Interest Rate
One of the best reasons to refinance is to lower the interest rate on your existing loan. Ideally, as a rule of thumb, refinancing is a good idea if you can reduce your interest rate by at least 1.5%. However, many lenders say 0.5% savings is enough of an incentive to refinance.
Reducing your interest rate not only helps you save money, but it also increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment. For example, a 30-year fixed-rate mortgage with an interest rate of 5.5% on a $200,000 home has a principal and interest payment of $1136. That same loan at 4.1% reduces your payment to $954.
Refinancing to Shorten the Loan’s Term
When interest rates fall, homeowners sometimes have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a significantly shorter term.
For a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to 5.5% can cut the term in half to 15 years with only a slight change in the monthly payment from $805 to $817. However, if you’re already at 5.5% for 30 years ($568), getting, a 3.5% mortgage for 15 years would raise your payment to $715. So do the math and see what works or let us do it for you.
Refinancing to Convert to an ARM or Fixed-Rate Mortgage
While ARMs often start out offering lower rates than fixed-rate mortgages, periodic adjustments can result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to fixed-rate mortgage results in a lower interest rate and eliminates concern over future interest rate hikes.
Conversely, converting from a fixed-rate loan to an ARM—which often has a lower monthly payment than a fixed-term mortgage—can be a sound financial strategy if interest rates are falling, especially for homeowners who do not play to stay in their homes for more than a few years.
While the above-mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to a never-ending debt.
Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodeling or a child’s college education. These homeowners may justify the refinancing by the fact that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source.
Your mortgage may be one of the biggest and most important investments you make in your entire life – and it can also help you reach your future financial goals. A mortgage refinance can be a wonderful tool to help you reach those goals sooner.