When To Consider Refinancing Your Home Mortgage Loan

By Michael Diaz. May 7th 2016

With interest rates at all-time lows, many homeowners are considering refinancing their mortgages. However, it is not necessarily always a good idea to do a mortgage refinancing. Therefore, it is important to get up to speed on the scenarios when a refinancing might be smart financial move. These are the most common motivations for refinancing a mortgage loan.

You Want To Lower Your Monthly Payment

If interest rates have dropped recently, you might want to look into refinancing your mortgage to get a lower interest rate than what you are currently paying. Refinancing to a lower interest rate will lower your monthly mortgage payment (because you are now paying less interest) and can also lower your overall interest expense over the life of the mortgage.

Keep in mind that there are costs associated with refinancing. Typically, your lender will charge you some hefty refinancing and closing fees to refinance your mortgage at a lower interest rate. Therefore, you should do the math ahead of time to make sure that the monthly savings on interest will be greater than the transaction costs of the refinancing. If you do not plan on staying in your house for more than a few years or you have paid down most of the interest on your mortgage, you should think long and hard about refinancing to a lower interest. In these scenarios, it could end up being a money losing decision.

Although the exact refinancing terms will vary by lender, generally, you have to have decent credit and at least some equity built up in order to qualify for refinancing at a lower interest rate.

You Want Switch Your Interest Rate Type

If you have an adjustable rate mortgage (which means that the interest rate on your mortgage can change throughout the life of the loan), you can look into converting it to a fixed rate mortgage. The primary reason for doing this is that the interest rate on your adjustable rate mortgage has increased and you can no longer afford to make the higher interest payments. Switching to a fixed rate mortgage will prevent your interest rate from moving around. It might also allow you to get a lower interest rate if market rates have recently fallen.

You Want To Take Cash Out Of Your House

If you are in need of money and have equity in your home, you can do a cash-out refinancing to pull equity out of your house in the form of cash. Here is how it works. If you owe $50,000 on your mortgage and your house is worth $200,000, then you have $150,000 of equity built up. Let’s say that you want $40,000 to do a substantial home renovation. A cash-out refinancing will allow you to increase the amount that you owe on your mortgage to $90,000 and receive a check for $40,000.

Because you are increasing the amount of money that you owe on your home, you should only do a cash-out refinancing if you are also reducing the interest rate on your mortgage in the process. Otherwise, it might be a better decision to take out a home equity loan or a home equity line of credit, which can offer lower interest rates.

Common motivations for pulling cash out of a home include doing home renovations, paying off other higher interest debt (e.g. credit card debt), paying for college or buying a new home.

You Want To Change Your Mortgage Term

If you originally signed up for a 30 year mortgage, but can now afford to pay off your mortgage sooner, you might want to look into reducing your mortgage term from 30 to 15 years. Although this will certainly increase your monthly principal payments, it will significantly reduce your overall interest expense.

Conversely, if you took out a 15 year mortgage and can no longer afford your monthly mortgage payment, you might consider refinancing to a 30 year mortgage. You will end up paying more in interest over the life of the loan, but you should see a reduction in your monthly mortgage payments. Remember that you should factor in the costs associated with the refinancing transaction before making a final decision.

You Want To Consolidate Loans

If you have multiple mortgages on your property because you took out a home equity loan or a home equity line of credit, you will likely be paying significantly more interest on your second mortgage than you do on your first. Refinancing can allow you to convert the two loans into one loan and pay a lower combined interest rate. (To learn more about second mortgages, see Helpful Advice On Taking Out A Second Home Loan Mortgage.)

You Have A Life Event

If your spouse dies or you are getting a divorce, you might find yourself struggling to make the monthly mortgage payment. Refinancing your mortgage by getting a lower rate or extending your mortgage term can help to make your monthly mortgage payment more manageable. Again, it is crucial to factor in the costs of refinancing before going through with the transaction.

Refinancing your mortgage can end up saving you a lot of money, particularly if you can get a lower interest rate, a shorter term or you can consolidate multiple loans. A mortgage refinancing can also help you to secure cash if you are in need of additional liquidity. However, it is crucial to understand the total cost associated with refinancing. This will ensure that you come out ahead if you decide to refinance.

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