If done correctly, refinancing can save you thousands of dollars over the life of your mortgage. Refinancing may even save you hundreds of dollars each month when you make your payment. If that scenario sounds like a win-win, then read on. Here are five reasons to consider refinancing your home.
1. Get rid of that adjustable rate mortgage (ARM).
You probably chose an ARM because the interest rate was really low. However, now time has passed, and your interest rate has risen along with your payment. Maybe your rate is still reasonable, but you know that at any moment, it could become untenable. If these situations sound familiar, it’s time to refinance. Interest rates are still low, so take advantage of them while you can.
2. Lower your monthly payment.
If you overestimated how much you could pay each month, then refinancing to lower your mortgage payment is a good idea. You can lower your payment by finding a lower interest rate. However, even if you can’t find a lower rate, you can still lower your monthly payment by changing your loan from a shorter-term loan to a longer-term loan. For example, refinance your 15-year mortgage to a 30-year mortgage, and your payments will be more manageable.
3. Lower your interest rate.
Lower interest rates are tempting because even a point of two can save many thousands of dollars over the life of the loan. Nevertheless, it’s a good idea to consider a few factors before refinancing simply to score a lower rate. First, determine how much you will save each month. Next, figure out how many months it will take to break even from any closing costs. Finally, determine how long you will be in the home. If you come out ahead, then look into refinancing.
4. Pay off your mortgage sooner.
If interest rates are low enough so that you can refinance to a shorter-term loan and keep your payments about the same, you should refinance. Consider this example. The Smiths have a $100,000 30-year mortgage at 6 percent. At this rate, they will pay about $116,000 in interest. If they refinance the $100,000, using a 15-year mortgage at 3 percent interest, they will pay only about $37,500 in interest. By refinancing, they can save about $78,500!
5. Free up some cash.
Some people refinance their mortgages with an entirely different goal in mind. Instead of saving money or shortening the life of their loan, they need some money right away. Maybe their home needs a new addition, or perhaps they found a rental property that could generate passive income. If you have equity in your home, you can refinance it, pull some equity out, and end up with cash in your hand. With today’s low interest rates, you may be able to liquidate some equity while keeping your payment very close to what you are used to.
Refinancing is a good idea for many homeowners, especially if they plan on staying in the home for a significant number of years. Why not crunch some numbers and find out if it is right for you?