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Refinancing for the right reasons

A mortgage refinance can be the right solution for a variety of financial needs, not just to lower monthly payments. In fact, some homeowners opt to refinance even if their payments will rise because they prefer to pay off their loan more quickly at a lower interest rate, or they prefer to lock in their payments rather than have an adjustable rate loan.

6 reasons refinancing may be right for you

  1. Reduce your interest rate. Paying a lower interest rate may save you money every month and may help you build equity in your home more quickly. When refinancing your home to a lower rate, if you can save $100 per month on your monthly payments this can add up to $12,000 in 10 years. A mortgage refinance into a loan with a lower interest rate can be accomplished if current rates are lower than your existing loan, or if you have improved your credit score by decreasing debt. Consumers with the highest credit scores qualify for mortgage loans at the lowest market rates.
  2. Reduce your monthly payment. Refinancing into a new 30-year mortgage loan can lower your monthly payments. Some lenders even allow you to refinance into a 40-year home loan. The downside to lengthening the term is that you will pay significantly more interest over the longer life of the loan. You can reduce the interest paid by making extra payments to principal or by making more frequent payments such as biweekly (every two weeks).
  3. Pay off your loan faster. Shortening the length of your loan can help you pay down your mortgage debt faster. Typically, shorter-term home loans have a lower interest rate, and since you are paying back the mortgage faster, you may save a significant sum in interest payments. The downside to the shorter term is that the monthly payments are usually higher. For example, on a $200,000 home mortgage, the payment on a 30-year loan at 6 percent is about $1,199 per month. A 15-year loan at 5.5 percent is $1,634 per month. However, the savings in interest over the entire loan period is huge: instead of paying $231,640 in interest for that 30-year loan, refinancing to a 15-year mortgage costs $94,120 in interest, a savings of $137,520.
  4. Switch to a fixed-rate loan. If you have an adjustable-rate mortgage (ARM) or a loan with an interest-only option for a certain number of years you may want to consider refinancing into a fixed-rate loan in order to establish a steady monthly payment. When interest rates are relatively low, this makes a lot of sense, so that you aren't stuck later on with a higher interest rate and higher monthly payments.
  5. Switch to a better ARM. If you have an adjustable-rate mortgage, you may want to consider refinancing into another ARM if the terms are better. A new ARM may have a lower interest rate or have better terms such as lower payment caps or smaller interest rate adjustments.
  6. Take out cash. If you have a lot of equity in your home and are interested in debt consolidation, a cash-out refinance may be a good way to accomplish this. If you qualify for a home refinance for more than the value of your home, the lender will give you a check for the balance. In some cases, if you are refinancing your home for debt consolidation, the lender may pay your existing creditors directly with checks issued at the settlement. You may choose a cash-out refinance in order to make home improvements, pay college tuition or even invest in a business.

While using the equity in your home for other purposes can sometimes be smart, especially if you are paying off high interest credit card debt, just remember that it could take a long time to rebuild the value in your home. If you decide to sell the property, your profit will be lower. Lenders typically will allow refinancing up to about 85 or 90 percent of the value of the home, so if you want to take out cash, you will need at least 20 percent equity or more in the property.

Whether you are refinancing to consolidate debt, lower your monthly payments or shorten your loan term, it always makes sense to compare mortgage refinancing offers from a number of lenders.

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