There are a variety of good reasons to refinance. With today’s incredibly low interest rates, you may be able to save on your mortgage payments every month. Refinancing may also give you cash back for you to use on home improvement, or to consolidate debt or pay off credit card debt. If you already have two loans or a second mortgage, refinancing both loans may simplify your finances while also saving you money. You may also choose to change your payment terms, such as converting to a fixed rate loan to lock in low interest rates, or change to a shorter mortgage term to pay off your home quicker.
Benefits of Refinancing
By refinancing your mortgage, you may replace your current home loan with a new mortgage with better terms. Refinancing may save you thousands of dollars as well as offer you the peace of mind of a mortgage with fixed monthly payments.
For example, if you have a 15-year mortgage with a balance of $150,000 and a fixed interest rate of 7%, and you refinance the home for a mortgage with a 5%* interest rate, you could save more than $29,000 in interest payments over the life of the loan. In order to qualify to refinance, you must be up-to-date on your mortgage payments and have a good credit history.
Lower Monthly Mortgage Payments
Refinancing your mortgage may reduce your monthly payments. By refinancing you could extend the term of your loan from say, 15 years to 30 years, which could reduce your monthly payments. For example, the monthly payments of a $200,000 mortgage with a 7% interest rate would drop from about $1,792 to $1,329 by changing from a 15-year loan to a 30-year loan.
Lower Interest Payments
If interest rates have dropped since you originally purchased your home, you may be able to refinance it to a lower interest rate. This could save you a lot of money. For example, if you reduce the interest rate of a 30-year $200,000 mortgage by just 1% – say, from 6% to 5%* – you could save more than $45,000 in interest payments.
A cash-out refinance lets you to tap into your home’s equity by taking out another mortgage for more than you currently owe. To apply for a cash-out refinance, you must have positive equity. In other words, the market value of your home must be greater than the balance left on your current mortgage.
Fixed Interest Rate
Refinancing your mortgage may change your current variable-interest or interest-only mortgage to a fixed-interest mortgage. Fixed interest rates give you the peace of mind of knowing what your monthly payments will be for the life of the loan. If you have an interest-only loan and refinance it to a fixed-interest mortgage, you might not see your monthly payments decrease, but you could save money on interest payments.
* Closing costs will affect the APR (annual percentage rate).