Why is it a good idea to refinance my mortgage?
It's a good idea to refinance your mortgage if doing so can help improve your finances. Refinancing could lower your interest rate. This can reduce borrowing costs. It could allow you to lower your monthly payment and provide more flexibility in your budget. It could also make it possible to tap into your home equity -- you might want to take cash out to finance home improvements, for example. Or it could help you change the terms of your current loan to one that's a better fit.
Four reasons to refinance your mortgage
Here are four of the best reasons to refinance your home loan.
1. Reduce your interest rate
A lower interest rate means more of your monthly payment goes toward paying off what you owe. Depending on the decisions you make on your repayment timeline, a lower rate can also reduce total interest costs, get you a lower monthly payment, or do both.
Refinancing rates are high right now, so it's not a great time to refinance for a lower interest rate. The one exception might be if your initial rate was higher because your credit score was lower when you first borrowed -- if current rates are lower than your existing mortgage, it might make sense for you to refinance. It's a good idea to shop around with refinance lenders to get the best rates.
2. Change your payoff timeline
You can change your repayment schedule by refinancing.
If you have 20 years left on your mortgage, you could refinance to a 15-year loan. A shorter repayment time could raise your monthly payment -- sometimes even if you reduce your interest rate. But it could substantially reduce your total payment costs.
You could also refinance to a loan that has a longer repayment timeline. With this strategy, you might save money on your monthly payments, even if you don't drop your rate much. But doing this could make total loan costs higher -- even if your rate is lower -- because you'd pay interest for longer.
A mortgage calculator can help you understand how the payoff timeline and interest rate affect your monthly costs and total costs over time.
3. Change your loan type
If you have an adjustable-rate mortgage, you may decide to refinance to a fixed-rate loan. That way, you won't have to worry about rates and payments rising in the future. Or if you have an FHA loan and are paying mortgage insurance, you may refinance to a conventional loan to eliminate mortgage insurance costs.
4. Tap into your home equity
If you have a lot of equity (ownership) in your home, you may want to use some of that money for other things. A cash-out refinance loan is one way to do that.
Here's how a cash-out refinance works: Let's say you have a mortgage for $100,000. You might refinance to a new mortgage of $150,000. Then, a lender will give you the extra $50,000 in cash. You can use this for home improvement projects, paying off credit card debt, or anything else you'd like.
This is an alternative to a home equity loan or home equity line of credit (HELOC). Cash-out refi loans can come with lower fixed interest rates than home equity loans, while HELOCs often have variable rates. And while home equity loans are tax deductible only if you use the money to buy, build, or improve your home, your refinance loan is deductible if you itemize on your tax return.