The main goal when refinancing your mortgage is to keep money in your pocket. So, if you find yourself weighing the options, here are six reasons to help you make a decision.
1. Secure a Lower Interest Rate
If the current rate is lower than the rate that you have on your fixed-rate mortgage, you may want to consider refinancing. There is no “rule” regarding how much the rate must drop before you refinance, but you want to make sure that you will save on your monthly payments and justify any refinancing fees that you will incur.
2. Change the Loan’s Term
Most people take out a 30-year term loan when buying a home because it has the lowest monthly payment and feels like the easiest to afford. If your financial situation changes, you may be able to refinance into a shorter-term, like 15 or 20 years, if you want to pay off your mortgage faster.
3. Convert Between ARM and Fixed-Rate Mortgage
If you have an adjustable-rate mortgage (ARM) loan, you may want to lock in a fixed rate to avoid the adjusting rates and uncertainty of your payments. You can refinance your ARM to a fixed-rate mortgage before it adjusts or during its adjusting terms.
4. Tap Into Equity for Remodeling
If you have equity in your home, you can use the money to reinvest in your home by renovating it. Not all upgrades will pay you back dollar for dollar, but it can be a good return on your investment or simply improve the aesthetics of your home.
You can borrow up to 80% of the value of your home. So whatever 80% of the value of your home is minus your mortgage amount is how much you can take out in equity.
For example, let’s say your mortgage balance is $100,000, and your home is worth $500,000. 80% of $500,000 is $400,000 minus your mortgage balance of $100,000 is $300,000. In this scenario, you could borrow $300,000.
5. Consolidate Debt
If you have a lot of high-interest debt, you can use your home’s equity through refinancing to pay it off. Most mortgage programs offer interest rates much lower than credit card interest rates, saving you money each month while giving you only one payment to worry about.
6. Get Rid Of PMI
If you borrowed over 80% of your home’s value when you bought the home, you’re likely paying Private Mortgage Insurance (PMI). However, if you’ve paid the balance down and/or the home appreciated, you can refinance at a loan-to-value (LTV) of 80% or less and save money on your monthly mortgage payment.
Look at the big picture before refinancing to make sure it benefits you not only now but in the future.
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