If you have an existing mortgage loan, you have the option to refinance it. You do this by securing a new home loan to pay off your original mortgage. But you may be wondering, why refinance if you already have a home loan? There are a few key reasons it may make sense.
Why is it a good idea to refinance my mortgage?
It’s a good idea to refinance your mortgage if doing so can help improve your finances. Refinancing could lower your interest rate. This can reduce borrowing costs. It could allow you to lower your monthly payment and so provide more flexibility. It could also make it possible to tap into home equity — you might want to take cash out to finance home improvements, for example. Or it could help you change the terms of your current loan to one that’s a better fit.
4 reasons to refinance your mortgage
1. Reduce your interest rate
A lower interest rate means more of your monthly payment goes toward paying off what you owe. Depending on the decisions you make on your repayment timeline, a lower rate can also reduce total interest costs, get you a lower monthly payment, or do both.
Refinancing rates are low right now, so it may be possible to qualify for a new mortgage at a lower interest rate than you’re currently paying. You may also be able to get a better mortgage rate if your credit has improved since you initially borrowed.
2. Change your payoff timeline
You can change your repayment schedule by refinancing. If you have 20 years left on your mortgage, you could refinance to a 15-year loan. A shorter repayment time could raise your monthly payment — sometimes even if you reduce your rate. But it could substantially reduce overall payment costs.
You could also refinance to a loan that has a longer repayment timeline. With this strategy, you might save money on your monthly payments, even if you don’t drop your rate much. But doing this could make total loan costs higher — even if your rate is lower — because you’d pay interest longer.
A mortgage calculator can help you understand how the payoff timeline and interest rate affect monthly costs and total costs over time.
3. Change your loan type
If you have an adjustable-rate mortgage, you may decide to refinance to a fixed-rate loan. That way, you won’t have to worry about rates and payments rising in the future. Or if you have an FHA loan and are paying mortgage insurance, you may refinance to a conventional loan to eliminate mortgage insurance costs.
4. Tap into your home equity
If you have a lot of equity (ownership) in your home, you may want to use some of that money for other things. A cash-out refinance loan is one way to do that.
Here’s how a cash-out refinance works: Let’s say you have a mortgage for $100,000. You might refinance to a new mortgage of $150,000. Then, the lender will give you the extra $50,000 in cash. You can use this for home improvement projects, paying off credit card debt, or anything else you’d like.