With interest rates the lowest they’ve been in a while, you may be thinking about refinancing your existing mortgage into a new one. As a homeowner, there are good reasons to consider this option: to get a lower interest rate, to drop private mortgage insurance, or to pull cash from your home’s equity to consolidate debt or make home improvements. The short answer, of course, is to have more money each month for groceries, car payments and the orthodontic’s bill.
Here are six reasons why you might consider refinancing your existing mortgage:
- Lower your interest rate and your payment. This is one of the top reasons that homeowners refinance their mortgage. If interest rates are lower than when you bought your house, refinancing the balance on your loan at a lower rate can reduce your monthly payment and the overall cost of the loan.
- Pay off your home faster. You may want to take advantage of low rates to reduce the term of your loan. Shorter terms mean lower rates. Keep in mind that switching from a 30-year to a 15-year loan will raise your monthly payment, but if you can afford to go with the shorter term, you’ll save thousands of dollars over the life of the loan. You’ll also build equity in your home quicker.
- Convert your adjustable rate into a fixed rate. Adjustable rate mortgage (ARM) loans can help you ease into your payments, especially if you are a first-time buyer or if you need lower payments initially. If you plan on staying in your home for several years, however, you may want to consider refinancing to a long-term fixed rate loan. Doing so can help you rest easier at night, knowing that your rate and payment will not change for the life of the loan.
- Your credit score has improved. If your credit score has gone up substantially from when you took out the loan, you may qualify for a better rate. For example, if you’ve been paying your bills on time and in full, your credit score has probably increased.
- Remove mortgage insurance. If you purchased your home with less than 20% down, you’re most likely paying private mortgage insurance (PMI). Refinancing will help you eliminate the extra expense if you’ve paid down your mortgage balance to 80% of the home’s original appraised value and/or have seen an increase in your home’s value to at least 20% equity.
- Take cash out to consolidate your debt or make home improvements. Every month that you make your mortgage payment, you’re building equity in your home. A cash-out refinance is when you tap into your home’s equity and get cash back to pay for other things, like paying down debt (high interest credit cards, student loans, medical bills) or creating a cash cushion. By consolidating your debts, you can lower your total monthly expenses and keep more money in your pocket.*
Been dreaming of a gourmet kitchen? You can also take cash out and use it to remodel or update your home. By doing a little research, you can also make the right upgrades (bathroom, windows, landscaping) that will increase your home’s value and have you living in your dream home too!
Is this a good time for you to refinance? Our loan consultants say that if you’re planning to move in the next few years, probably not. But, they say, if you can shave one-half to three-quarters of a percentage point off your existing mortgage by refinancing, it’s probably worth investigating.