Under the right circumstances, refinancing your home can be a pretty savvy financial move. Refinancing can lower your monthly payment or get you some cash (depending on the type of refinance). Here are seven smart reasons to refinance your home.
1. Lower Your Monthly Payment
There are two ways you can lower your home’s monthly payment, and both are possible when you refinance.
One, you can get a lower interest rate. They’ve been on the rise for a while now, but you may still benefit if your rate is higher.
An important note: If your credit score has gone up since you bought your home, you should see if you qualify for a lower interest rate. This may make refinancing worth it. This cool calculator shows you just how much your credit score impacts your interest rate.
The other way to lower your payments is to extend the length of your loan. Of course, this comes at a cost. It’ll be longer before you own your home outright, and you’ll pay quite a bit more interest. This is a tactic best reserved for serious financial emergencies.
2. Pay Off Your Home Faster
Another option is to do the opposite of extending your loan—make your loan term shorter. You can refinance to a 15-year loan and save a lot of money in interest.
You can also make extra payments to pay off your loan faster (without refinancing), but you won’t get the lower interest rate that comes with a shorter loan term.
3. Convert an ARM to a Fixed-Rate Loan
If you have an ARM (adjustable-rate mortgage) and don’t want the stress of worrying about your monthly payment going up as interest rates rise, you can refinance to a fixed-rate loan. If interest rates will likely be going up over the next several years, this makes a lot of sense.
If you have a hybrid ARM, which has a fixed rate for three, five, or seven years before switching to an adjustable rate, you may want to wait to refinance at the end of your fixed-rate term.
4. Cancel Mortgage Insurance
When you make a down payment of less than 20 percent on a conventional loan, you have to make mortgage insurance payments. That insurance is automatically dropped once your mortgage balance has been paid down to 78 percent of your home’s original appraised value. But if you’re in a hot market where your home’s value has dramatically increased, you may be able to get it appraised and then refinance to drop mortgage insurance.
This can be especially good if you have an FHA loan. Unlike conventional loans, you can’t cancel the mortgage insurance on FHA loans, even if your loan-to-value drops below 80 percent. The only way to get rid of FHA mortgage insurance payments is to refinance.
5. Getting Cash
You can get cash from the equity you have in your home. This cash can be used for any reason, but some typical reasons people tap into their home’s equity are:
- Extensive home renovation or remodeling projects
- College tuition
Of course, this means that you’ll owe more on your home, but it can be worth it under the right circumstances.
6. Consolidate Debt
Mortgages usually have lower interest rates than other types of loans. If you use your cash to pay off higher interest debts like credit cards, installment loans, personal loans, or student loans, you can lower your total monthly debt payments by refinancing those loans into your home. Plus, you get a tax deduction on mortgage interest (some other types of loans have tax deductions, too).
7. Combine First and Second Mortgages
If you have two mortgages, you’re almost certainly paying a higher interest rate on the second mortgage. After a waiting period (usually 12 months), you may be able to combine the two mortgages into one lower monthly rate.
Just like any mortgage, you’ll need to have more than 20 percent equity to avoid paying mortgage insurance.
Does it Make Sense?
Of course, the most important thing is to make sure that refinancing makes sense for you. Some of these calculations can be complicated, so I’m here to help you figure it out. Give me a call, and let’s sit down and see if a refinance is in your future!