Should I Refinance My Mortgage?

As Americans evaluate their budgets and try to find more ways to save, many of them are asking themselves, "Should I refinance my mortgage?" Particularly when market interest rates are low, homeowners should take the time to see if they can quality for a new home loan.

Refinancing can potentially save you money each month, making your budget easier to handle--but in some cases, it can also save you hundreds and perhaps thousands of dollars in interest payments by the time your entire mortgage is paid in full.

Think back to when you first settled on your current mortgage. Whether you accepted this mortgage a decade ago or just a few years ago, your circumstances and your lifestyle may have changed. Your income may have changed or you may have different priorities. An annual budget evaluation should include at least a quick review of your mortgage to see if a mortgage refinance should be considered.

Many property owners are paying too much for their mortgage loans or are locked into mortgages that are unsuitable for their income level or their financial goals. Financial experts recommend that your mortgage payment require no more than a third of your gross monthly income. If you have some home equity but are finding it difficult to meet your mortgage payment--perhaps because you have an adjustable-rate loan whose interest rate has risen or because your income has dropped--you should seriously consider refinancing.

Even if your current home loan payments are affordable, there are other reasons to consider refinancing. Here are the main reasons why homeowners choose to refinance:

Save on Interest Payments

You might be able to refinance your home loan to a lower interest rate than your current mortgage rate. A mortgage lender can help you determine whether the interest savings are enough to offset the cost of the refinanced mortgage--with a significant rate drop, you can potentially save thousands of dollars over the full term of your loan.

Lower Your Monthly Payments

Many homeowners refinance in order to ease their monthly payments. Refinancing to a lower interest rate is one way to do this, but in addition, homeowners can extend the term of their loan to reduce their monthly payments. You can choose a 30- or 40-year fixed-rate loan for the remaining principal on your current loan.

Consolidate Your Debts

If you feel overloaded by high-interest debt on your credit cards or car loans, you may be able to consolidate all your debt into your mortgage payment. For example, if you have a $100,000 mortgage and $20,000 in credit card debt, you may qualify for a $120,000 mortgage and use the extra $20,000 to pay your other debt. Mortgage loans typically carry a significantly lower interest rate than consumer debt such as credit card debt, so refinancing can help in decreasing debt more quickly. Best of all, mortgage interest, unlike credit card interest, is usually tax-deductible.

Provide Spare Cash

One of the best reasons to refinance is to make home improvements or repairs. Such improvements may add to the value of your home, and you can wrap the costs into your monthly mortgage payments. Some homeowners choose to refinance into one mortgage, while others opt for a home equity loan or a home equity line of credit as the best way to access the equity value in their home.

Freed-up cash can also be used for other purchases or for college tuition. The best expenditures are investments rather than frivolous purchases--remember that you are reducing the equity in your home when you take out some of the value in cash.

Pay off Your Home Mortgage Sooner

Would you like to own your home free and clear as soon as possible? Consider refinancing your home to a shorter term, such as 15 years. While 15- and 30-year home loans are standard, mortgage lenders are also willing to consider home loans on your terms.

Increase Your Financial Security

If you have an adjustable-rate home loan, you might want to refinance to a fixed-rate loan so that your mortgage payments will stay the same for the entire loan period. This is particularly helpful if you expect interest rates to rise.

While there are seemingly as many reasons to refinance as there are homeowners, every decision to refinance should be based on solid calculations. Test out different refinancing scenarios to see how long it will take to recoup your costs. Use our refinance loan calculator to see if you will benefit from refinancing your mortgage.