Why refinance my mortgage

Conversely, converting from a fixed-rate loan to an ARM—which often has a lower monthly payment than a fixed-term mortgage—can be a sound financial strategy if interest rates are falling, especially for homeowners who do not play to stay in their homes for more than a few years. These homeowners can reduce their loan's interest rate and monthly payment, but they will not have to worry about how higher rates go 30 years in the future.

If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments eliminating the need to refinance every time rates drop. When mortgage interest rates rise, on the other hand, this would be an unwise strategy. While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt.

Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodeling or a child's college education. These homeowners may justify the refinancing by the fact that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source.

Another justification is that the interest on mortgages is tax-deductible. Many homeowners refinance to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea.

Unfortunately, refinancing does not bring automatic financial prudence. Take this step only if you are convinced you can resist the temptation to spend once the refinancing relieves you from debt.

Be aware that a large percentage of people who once generated high-interest debt on credit cards , cars, and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so.

This creates an instant quadruple loss composed of wasted fees on the refinancing, lost equity in the house, additional years of increased interest payments on the new mortgage, and the return of high-interest debt once the credit cards are maxed out again—the possible result is an endless perpetuation of the debt cycle and eventual bankruptcy.

Another reason to refinance can be a serious financial emergency. If that is the case, carefully research all your options for raising funds before you take this step. If you do a cash-out refinance, you may be charged a higher interest rate on the new mortgage than for a rate-and-term refinance, in which you don't take out money.

Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan, or helps you build equity more quickly. When used carefully, it can also be a valuable tool for bringing debt under control. Before you refinance, take a careful look at your financial situation and ask yourself: How long do I plan to continue living in the house?

How much money will I save by refinancing? It takes years to recoup that cost with the savings generated by a lower interest rate or a shorter term.

So, if you are not planning to stay in the home for more than a few years, the cost of refinancing may negate any of the potential savings. It also pays to remember that a savvy homeowner is always looking for ways to reduce debt, build equity, save money, and eliminate their mortgage payment.

Taking cash out of your equity when you refinance does not help to achieve any of those goals. Internal Revenue Service. Accessed Jan. Refinancing A Home. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. Terms may apply to offers listed on this page. 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. 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. 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. It's a good idea to shop around with refinance lenders to get the best rates. If you have 20 years left on your mortgage, you could refinance to a year loan.

A shorter repayment time could raise your monthly payment -- sometimes even if you reduce your rate. But it could substantially reduce total 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. 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.

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. You can use this for home improvement projects, paying off credit card debt, or anything else you'd like.

Cash-out refi loans can come with lower fixed interest rates than home equity loans, while HELOCs often have variable rates. Many lenders facing high loan demand and staffing issues increased their fees, adjusted minimum required credit scores or temporarily suspended certain loan products. While some products and business practices have returned to pre-pandemic levels, you might still find delays and limited options.

With mortgage rates near rock bottom, it's a good time to refinance a mortgage , right? Sure, in many cases, no doubt. All of these things, along with current refinance interest rates, should play a role in your decision about whether — and when — to refinance.

The usual trigger for people to start thinking about a refinance is when they notice mortgage rates falling below their current loan rate. But there are other good reasons to refinance:. If you're looking to pay off the loan quicker with a shorter term.

You've gained enough equity in your home to refinance into a loan without mortgage insurance. You're looking to tap a bit of your home equity with a cash-out refinance. When the Federal Reserve lowers short-term interest rates, many people expect mortgage rates to follow.

Avoid focusing too much on a low mortgage rate that you read about or see advertised. Mortgage refinance rates change throughout the day, every day.

Your mortgage refinance rate is primarily based on your credit score and the equity you have in your home. Such broad generalizations often don't work for big-money decisions.

A half-point improvement in your rate might even make sense. To determine if refinancing makes financial sense for you, it's a good idea to run the real numbers with a mortgage refinance calculator. Also, check whether you face a penalty for paying off your current loan early.