Refinancing a Mortgage: When to Do It

Homeowners can choose to refinance their mortgages, which entails getting a new loan on the property to repay their current one. Many consider taking this option when interest rates drop or have remained stable for a long time, but things are not always that easy. For example, different refinance options have varied financial implications, making it crucial to consider each carefully. Still, refinancing could make sense to you, so keep reading to find out if this is the case, or whether you should consider another option.

Refinancing Can Lead to Lower Interest Rate

The most common reason for refinancing is to save money. Financial advisors say you should consider a new loan if you can reduce your interest rate by about 2%. While it might not seem like much monthly, it makes a huge difference over the loan’s term.

If you are refinancing for this reason, there are a few things to keep in mind. First, you are likely to qualify for a better (lower) interest rate if you have improved your credit score since you took out your current mortgage. You should check it often and avoid things that look like red flags to a lender, such as missed payments or a lot of credit card debt.

Second, it can increase equity in the home faster while decreasing your monthly payments. Home equity is crucial because it increases the value of your assets and helps you build wealth. 

It Can Help You Deal with High Interest Debt

If you have high-interest debt that makes it harder to save money or repay your mortgage, you can use a cash-out refinance to leverage your home’s equity to take out an additional loan. 

With this arrangement, the second loan is much bigger than your mortgage, which makes it possible to use the difference to pay any debts you have. Instead of having many smaller loans, you have one tied to your home. 

You can also save thousands of dollars if the cash-out refinance option leads to lower monthly payments than you would have paid on all your debts.

Refinancing Can Shorten a Loan’s Term

When interest rates fall, homeowners can look around and use mortgage comparison platforms to find refinance options that would result in a much shorter term. In most cases, they lead to little change in your monthly payments, but you have to do the math to find out what works.

For example, refinancing a 9% loan with a 5% one on a 30-year mortgage can halve the term with a small increase in your monthly repayment. However, a significant difference in the interest rate can lead to higher monthly payments, so be careful when looking at the loan terms.

The good news is that reputable mortgage lenders can break the numbers down for you accurately and honestly. Since they care about their relationships with their clients, they want to ensure they fully understand refinancing and what would change while assisting them to find the best loan options.

Switching from an Adjustable-rate Mortgage to a Fixed-rate One

Adjustable-rate mortgages (ARM) have a catch that many people do not notice. In the excitement of becoming a homeowner, you might not notice that these loans have a lower interest rate than fixed-rate mortgages, but these rates increase over time. This happens as the lenders make periodic adjustments due to various factors.

It is common for these loans to have much higher interest rates than fixed-rate ones in a few years. Converting to the latter means you pay a higher interest at the start, but lower interest payments over the loan’s term.

You can refinance your home to convert from an ARM to a fixed-rate mortgage, with this option eliminating concerns about rate increases in the future. If you plan on selling your home in a few years, you can also refinance a fixed-rate mortgage with an adjustable-rate one to take advantage of falling interest rates.

You Are Struggling with Monthly Payments

Life happens, and some people are unable to meet their monthly repayment obligations for different reasons. If you are in this situation, you do not have to default because you can talk to your lender to see if they can reduce your monthly payments. Do understand that doing so will also increase the term and lead to you paying more due to the interest on the loan.

Refinancing is worth it if you can find value in doing so. For example, you can take this option to alter your monthly payments or loan terms. Always talk to an experienced loan or mortgage lender to understand your options and how refinancing can be beneficial.