Key takeaway
Refinancing your mortgage may have several potential benefits: It could reduce your monthly principal and interest payment or it could help you pay off your mortgage faster. You’ll want to review any costs associated with the refinancing, as well as the new interest rate of your loan, to determine if a refinance might make sense.
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Depending on when you purchase your home, you may notice that interest rates go up or go down in the months or years after you secure your mortgage. Additionally, you may find that your credit score changes — perhaps it goes up based on smart financial decisions you’ve made around your debt.
If rates are lower, or you think your credit rating may qualify you for a better interest rate than you received when you first got your mortgage, you may consider refinancing. A refinance is essentially getting a new mortgage to replace the one you currently have. Read on for information on when refinancing your mortgage may benefit you.
Why refinancing your loan could make sense
1. To get a lower interest rate
When you’re making mortgage payments, you’re paying against the principal and the interest your lender charges on the loan. The lower your interest rate is, the less you’ll pay in interest over time. This can mean you pay more of the principal loan amount each month to pay off your mortgage more quickly, or that you free up more of your monthly budget for other day-to-day expenses or for saving for future goals.
Taking advantage of a lower interest rate is the #1 reason homeowners refinance their mortgage, according to the U.S. Census Bureau.
2. To reduce the time frame of your mortgage
You may be able to refinance to reduce the amount of time it will take to pay off your mortgage. For example, if you had 22 years left on your initial loan, you may be able to refinance by choosing a 15-year or 20-year mortgage. It’s important to review the impact this may have on your monthly principal and interest payment, however. Shortening the length of your mortgage may make your monthly payment higher, depending on the interest rate and other factors.
3. To switch from an adjustable rate to a fixed rate
If you have an adjustable-rate mortgage (ARM), the interest rate can go up or down over time based on market conditions. If you have an ARM and you expect interest rates to go up, you may consider refinancing to lock in a fixed rate, especially if rates are low.
4. To eliminate mortgage insurance
If you made a down payment of less than 20% of the purchase price initially, or your loan required private mortgage insurance for another reason, certain steps may help you eliminate your PMI.
If you can show that your home has increased in value, or you have paid down your loan balance enough, you may be able to request that your lender remove the PMI from your loan. Typically, you will need to have 20% equity (the difference between the market value of your home and what you owe on your mortgage) in your home. Depending on what type of property your home is, lenders may be required to end your PMI obligation after a certain amount of time. Other factors to remove PMI include having a good payment history, the currency of the loan, and depending upon the investor, an automated valuation model (AVM).
Ways to potentially pay down your mortgage faster
This strategy may help reduce the amount of interest you pay over time. But it’s important to consider your full financial picture.
View article
Preparing for life’s “what ifs” as a homeowner
If you have financial challenges after you become a homeowner, your mortgage lender may be able to find options that can help you.
View article
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If you are a service member on active duty, an eligible spouse, partner, or dependent, or currently receiving SCRA benefits, please consult with your legal advisor prior to seeking a refinance of your existing mortgage loan. In some cases, a refinance may impact your eligibility for benefits under the Servicemembers Civil Relief Act or applicable state law.
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FAQs
Refinance to a loan with a lower interest rate can save you money in the long-term. Refinancing typically entails costs, such as closing costs. Consider staying in the home long enough to recoup the costs of refinancing. Getting rid of the cost of private mortgage insurance (PMI) is one good reason to refinance.
What are the benefits of refinancing a mortgage? ›
Pros of mortgage refinance
You could lower your interest rate. You could lower your mortgage payment and create more space in your monthly budget. You could decrease your loan's term and pay it off sooner. You could tap into your home's equity and take cash out at closing.
What are the top 5 reasons to refinance your home? ›
Top 5 reasons to refinance and the pros and cons of each
- You'll improve your monthly cash flow. ...
- Possibility to reduce your overall interest payments. ...
- Predictability, stability and potential cost savings. ...
- You could pay off your loan faster.
Refinancing your mortgage can help you secure a lower interest rate and lower monthly payments, plus it can allow you to tap into the equity you've built in your home. Before choosing to refinance, though, evaluate current interest rates, the total cost of refinancing and whether you meet lender qualifications.
Is refinancing a house a good idea? ›
Refinancing your mortgage could make sense for many reasons, including lowering your interest rate, taking cash out or switching to a fixed-rate mortgage. For most borrowers, the ideal time to refinance is when market rates have fallen below the rate on their current loan.
Does refinancing actually save you money? ›
Depending on what kind of loan you are eligible for, refinancing might offer you one or more benefits, including: a lower interest rate (APR) a lower monthly payment. a shorter payoff term.
What are the purposes of refinancing? ›
Common goals from refinancing are to lower one's fixed interest rate to reduce payments over the life of the loan, to change the duration of the loan, or to switch from a fixed-rate mortgage to an adjustable-rate mortgage (ARM) or vice versa.
What is not a good reason to refinance? ›
Key Takeaways. Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.
What are the negatives of refinancing your house? ›
The main benefits of refinancing your home are saving money on interest and having the opportunity to change loan terms. Drawbacks include the closing costs you'll pay and the potential for limited savings if you take out a larger loan or choose a longer term.
Why do banks always want you to refinance? ›
Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender.
It offers lower interest rates. This is a key advantage of refinancing.
Why might someone want to refinance a loan? ›
Refinancing can allow you to change the terms of your mortgage to secure a lower monthly payment, switch your loan terms, consolidate debt or even take some cash from your home's equity to put toward bills or renovations.
What is the risk of refinancing? ›
Refinancing risk refers to the possibility that a borrower will not be able to replace an existing debt with new debt at a critical point in the future. Any company or individual can experience refinancing risk, either because their own credit quality has deteriorated or as a result of market conditions.
When should you not refinance? ›
You Already Have A Low Fixed-Term Mortgage Rate
If rates are lower than your current mortgage rate, it might seem like a no-brainer to refinance. But if your rate is already relatively low and current rates aren't significantly lower than yours, you might not end up saving as much money as you thought you would.
Do you get money back if you refinance your home? ›
A cash-out refinance is a type of mortgage refinance that takes advantage of the equity you've built over time and gives you cash in exchange for taking on a larger mortgage. In other words, with a cash-out refinance, you borrow more than you owe on your mortgage and pocket the difference.
Do you lose equity when you refinance? ›
The bottom line. You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
Are there any downsides to refinancing a mortgage? ›
Refinancing allows you to lengthen your loan term if you're having trouble making your payments. The downsides are that you'll be paying off your mortgage longer and you'll pay more in interest over time. However, a longer loan term can make your monthly payments more affordable and free up extra cash.
Does refinancing mean you pay more? ›
If you refinance to the same term as your original mortgage, you're further extending the time you have to pay off the loan, meaning your monthly payment will go down. And if you can refinance the loan with a lower interest rate, your monthly payment could go down even more.
What will happen if I refinance my house? ›
Loan starts over: You'll be replacing your current mortgage loan—and any time you have left until it's paid off—with a brand new mortgage. Depending on how long you've had your current mortgage and how long your new mortgage will last, you're likely extending the amount of years you'll be making mortgage payments.
