6 Smart Reasons to Refinance Your Home Loan

Mortgage refinancing involves paying off your current mortgage and replacing it with a new one. It’s a common practice, but is it the right move for you?

By no means should you apply for a new mortgage just for the sake of refinancing. Getting a mortgage can be costly, so only refinance when it’s worthwhile and can save you money. Here are 6 smart reasons to refinance your home loan.

Smart reasons tp refinance your home loan

1. Lower your mortgage rate

Getting a lower mortgage rate is one of the top reasons to refinance a mortgage loan.

Mortgage interest rates can change from year-to-year. And when rates drop, this is an opportunity for home owners to refinance their loans and take advantage of a lower rate. This often results in a cheaper monthly payment, and it reduces how much interest they pay over the life of the loan.

Keep in mind, though, getting a low-interest rate is dependent on your credit history. Refinancing involves applying for a new loan, at which point the lender will check your credit history to see if you qualify, and to determine what interest rate you’ll receive. So, if you’re thinking about refinancing, pay your bills on time, pay off debt, and dispute errors on your credit report to raise your score.

2. Get rid of mortgage insurance

If you purchased your home with less than a 20% down payment, you’re most likely paying mortgage insurance. This insurance protects your lender in the event of default, and since it’s included in your mortgage payment, it increases what you pay each month.

With a conventional home loan, lenders typically remove mortgage insurance once the property has at least 20% to 22% equity. But if you get an FHA home loan with only 3.5% down, mortgage insurance is for the life of the loan. To get rid of it, you would need to refinance your mortgage once you have 20% equity.

3. Get a fixed-rate mortgage

Adjustable-rate mortgages have a temporary fixed-rate period that typically last from 3-5 years. After the fixed-rate period concludes, the rate begins to adjust at regular intervals. These mortgages usually start with a lower interest rate than a fixed-rate mortgage. So, some borrowers select this option to get the lowest payment possible, and then they refinance to a fixed-rate mortgage before their first-rate adjustment.

Fixed-rate mortgages are often considered safer because the interest rate doesn’t change, resulting in predictable monthly payments.

4. Tap your home’s equity

A mortgage refinance is also useful for tapping into your home’s equity. By taking advantage of a cash-out refinance, you can use your equity for debt consolidation, funding home improvements, or paying for large expenses such as a wedding or tuition.

Keep in mind that a cash-out refinance does increase your mortgage balance, so there’s a good chance that your mortgage payment will increase.

5. Modify your loan term

If you need a cheaper payment, refinancing and resetting the clock for another 30 years extends your loan term, resulting in a lower monthly payment. This is an option if your monthly cashflow is tight and a reduced payment would help you to more easily meet your budget goals. However, this transaction will increase both the length of time you’ll have a mortgage payment and the total interest you pay for your home.

Similarly, some people refinance to decrease their loan term, which allows them to pay off the mortgage loan sooner. This approach enables them to own their home free and clear faster, but the shorter loan term will typically require an increased monthly payment.

6. Remove your name from the mortgage

Buying real estate with a co-borrower can be easier because lenders use your combined income to determine your qualifying amount. The problem with a joint mortgage is that removing someone’s name from the loan requires refinancing.

The person who wishes to keep the home (and their name on the mortgage) must apply for a refinance on their own, in which case, the approval is solely based off their credit score and income.

Final Word

Even though getting a new mortgage may extend your payoff date in certain situations, the financial benefits of refinancing might outweigh the extra years of mortgage payments.

Whatever you decide, know that refinancing isn’t cheap. You’re responsible for closing costs, which might range from 2% to 5% of the loan balance or higher depending on where you live. To learn more about refinancing, or to start your application, give us a call or complete our contact form today.

Disclaimer: Debt consolidation does not pay off the debt, please consult a financial advisor regarding the effect of consolidating short-term debt into long-term debt