5 reasons to refinance your mortgage
Potential benefits from refinancing
- Lower your interest rate
- Lower your monthly payment
- Shorten the term of your loan
- Move to a fixed-rate mortgage
- Take advantage of your home equity
Home-loan refinancing remains a popular option for many homeowners. Sometimes, in fact, homeowners refinance repeatedly over the course of paying off a home loan.
There's a cost to refinancing, however. The fees can range between 3 percent to 6 percent of the value of the loan, so it does not make sense in every instance and you should compare lenders to see what rates and terms are available to you. Still, there are plenty of good reasons to refinance.
1. Lower interest rate
Interest rates on home mortgages remain very low, and they have been edging downward even after reaching what were record-low levels. If you financed your home at a higher rate, even in the relatively recent past, refinancing can still make sense. The savings help create some of the other benefits of refinancing.
2. Lower monthly payments
A lower mortgage payment is the enticement for many homeowners, including those who already have what they thought was a good deal when they originally took out their loan. For instance, if you're financing a $250,000 mortgage at 4.5 percent interest over 30 years, a relatively small interest-rate cut to 3.8 percent will save you about $100 on your monthly payment ($1,266 to $1,164).
3. Shorter loan terms
Instead of taking advantage of the lower payments made possible by lower interest rates, some borrowers opt to keep their monthly payment at the same level or, if they can afford it, even increase their payment. Using the example above, if you're financing $250,000 at 4.5 percent over 30 years, a small interest-rate cut to 3.8 percent will take close to five years off the length of your loan if you continue to make the same monthly payment. The combination of lower rates and stable mortgage payments also allows you to build equity in your home more quickly than you would have before refinancing.
4. Convert to a fixed rate
Predicting interest-rate changes is tricky, but with rates falling and at, or near, historic lows, there's some reason to expect them to change direction and start edging up. If you have an adjustable-rate mortgage, refinancing allows you to lock in the low rates and not have to be concerned about any increases in the bellwether interest rates, which can trigger increases in adjustable-rate mortgages.
5. Tap equity for cash
If you already have made a significant dent in the principal of your loan, or if your home has been ratcheting up in value (or both), there can be a significant amount of equity in your home that you can convert to cash through refinancing. Borrowers put the proceeds of the loan to all manner of uses, such as:
- Investing in a business
- Buying out a spouse or other co-owner of the home
- Making a down payment on a vacation home or investment property
- Paying for a child's college education
- Paying off high-interest credit card debt
As enticing as it sounds, financial consultants advise their clients to be careful of cash-out refinances and warn them not to look at the loans as free money. You have to pay the money back, of course, and constantly drawing down the equity in your home can keep you on a debt treadmill and get very costly in terms of refinancing fees.