Owning a home and building equity opens up many opportunities. As a homeowner, there will be times you wonder if refinancing your mortgage makes sense. Rightly so, as there are quite a few reasons getting a new mortgage can improve your financial future if done right. Here are some of the most common (and less common) reasons you might want to consider refinancing your mortgage at some point.
Word of Caution from the author: Always remember, there are costs involved when refinancing, and it is a big financial decision. So don’t rush into it, and be sure you work with an expert who can educate you and talk you through the pros AND the cons of refinancing. Don’t make short-term decisions that negatively impact your long-term goals. And do NOT waste your savings after you do refinance! Ok, back to the five reasons:
1. Take advantage of lower interest rates:
- This is the most obvious, and the most common, reason homeowners look to refinance their existing mortgage. If interest rates have dropped since you first bought your house, you may be able to take advantage and lower your monthly payment by refinancing and getting a new mortgage. This can provide a quick boost to the ability to save or pay off other debts faster. Just be careful you don’t simply spend your savings.
2. Get cash out:
- If you are considering a remodel, or perhaps would like to consolidate some higher interest debt, or need cash for an opportunity that has come along, you may consider looking into a cash-out refinance. There are limitations, but simply put, you may be able to access some of the equity in your home to achieve the above goals. Often borrowing against your home is less expensive than other options. Your house is NOT an ATM machine, but done strategically, safely, and within an overall plan, your house can be a valuable financial tool.
3. Get rid of mortgage insurance:
- If you bought your house with less than 20% down payment, it’s likely you have monthly mortgage insurance included in your payment. As you pay your mortgage balance down, and your house appreciates in value to the point you have 20% or more equity, you may have the opportunity to refinance and get a new mortgage without mortgage insurance. Keep in mind you MIGHT be able to accomplish this goal directly through your mortgage servicing company, but if not, refinancing can be a good option.
4. Consolidate a 1st and 2nd mortgage:
- Another strategic way you may have financed your house with less than 20% down was by doing the first mortgage to 80% loan-to-value, and then borrowing the difference between this and your down payment in the form of a second mortgage or home equity loan. This is often done as an alternative to dealing with mortgage insurance (see #3). Or perhaps you took out a home equity loan or line of credit to remodel your house. If interest rates are favorable, and you have sufficient equity for it to make sense, refinancing to consolidate your first and second mortgages into one new mortgage can make good financial sense.
5. Change your mortgage terms:
- Perhaps you were overly aggressive or just had a fear of debt, leading you to finance your house using a 15-year mortgage. If you find that these higher than normal monthly payments are impeding your ability to save elsewhere, avoid using credit cards for vacations, or even worse, not allowing you to maximize your retirement contributions, you may want to consider refinancing to a longer-term mortgage. Even if a 30-year fixed-rate mortgage comes with a slightly higher interest rate, the lower required payments can free up cash flow to achieve other important financial goals. On the other hand, maybe you hope to retire in ten years, yet you have 22 years left on your current mortgage. If cash flow is good, and your other debts are all paid off, refinancing to a shorter-term mortgage might make sense. Again, this assumes all of your other financial “ducks” are in a row.