Why You Should Refinance Your Mortgage

Refinancing a mortgage replaces your home loan with a new one. When you refinance a mortgage, the money doesn’t go to the home seller, as was the case with the previous loan. Instead, the new loan is used to pay off the old one’s balance.

You have to get qualified for refinancing the mortgage like you had to for your original loan. To refinance a mortgage:

  • Determine your goal (why you want to refinance the mortgage)
  • Shop for the best refinance rate
  • Apply for a mortgage with 3-5 lenders
  • Pick the best refinance lender
  • Lock your interest rate
  • Close on the loan

Here’s why you should refinance your mortgage:

Pay off your loan faster

If you refinance a 30-year mortgage into a 15-year one, you can pay off your loan in half the time. This also means lesser interest accumulates, so you’ve to pay less. However, refinancing your mortgage to a shorter-term one usually increases the monthly payment.

Reduce the monthly payment

This may seem contradictory, but you can refinance a mortgage with a lower interest rate to reduce your monthly payment. You could also extend the loan term to pay less every month, but this would increase the interest you’ve to pay.

Switch from an adjustable-rate to a fixed-rate loan

While an adjustable-rate mortgage (ARM) initially offers lower interest rates, they may go up over time. A fixed-rate loan provides you the benefit of having a steady interest rate, which means your monthly payments will not change.

Tap into equity

Refinancing to borrow more than what you currently owe leads to the lender giving you a check for the difference. This cash-out refinance helps you get a lower interest rate as well.

Get rid of FHA mortgage insurance

If you’ve taken a conventional home loan, you could get the private mortgage insurance on it canceled. However, in the case of Federal Housing Administration (FHA) loans, the FHA mortgage insurance premium (MIP) is unlikely to get canceled.

The only way to eliminate the premiums is to sell your home or refinance your mortgage after accumulating enough equity. You can calculate home equity by estimating your home’s value, then subtracting the mortgage balance from it.

Use a mortgage refinance calculator to shop for the best mortgage and get an idea of what to expect after taking the big step.