To refinance a mortgage means to pay off your existing loan and replace it with a new one.
There are many reasons why homeowners opt to refinance, from
obtaining a lower interest rate, to shortening the term of the loan, to
switching mortgage loan types, to tapping into home equity.
Each has its considerations.
Lower Your Mortgage Rate
Among the best reasons to refinance is to get access to lower
mortgage rates. There is no “rule of thumb” that says how far rates
should drop for a refinance to be sensible. Compare your closing costs
to your monthly savings, and determine whether the math makes sense for
Shorten Your Loan Term
Refinancing your 30-year fixed rate mortgage to a 20-year fixed rate
or a 15-year fixed rate is a sensible way to reduce your long-term
mortgage costs, and to own your home sooner. As a bonus, with mortgage
rates currently near all-time lows, an increase to your monthly payment
from a shorter loan term may be negligible.
Convert ARM To Fixed Rate Mortgage
Homeowners with adjustable-rate mortgages may want
the comfort of a fixed-rate payment. Mortgage rates for fixed-rate
mortgages are often higher than for comparable ARMs so be prepared to
pay more to your lender each month.
Access Equity For Projects, Debts, Or Other Reasons
Called a “cash out” refinance, homeowners can sometimes use home
equity to retire debts, pay for renovations, or use for other purposes
including education costs and retirement. Lenders place restrictions on
loans of this type. A refinanced home loan can help you reach specific
financial goals or just put extra cash in your pocket each month – just
make sure that there’s a clear benefit to you.
Paying large closing costs for small monthly savings or negligible
long-term benefit should be avoided. Many lenders offer low- or
no-closing costs options for refinancing. Be sure to ask about it.