Should I Consider Refinancing My Mortgage?

There are many different reasons why a homeowner might choose to refinance their mortgage. This helpful guide will explain the most common ones, along with their pros and cons.

Mortgage refinancing works in much the same way that your initial home loan process worked when you purchased your house. You choose the type of loan you would like to apply for, file an application, and, if approved, proceed with the underwriting and closing process. However, instead of the money going to the seller of the home, the money goes to pay off your previous loan, and you start new payments on your new loan.

So, why would someone want to refinance their home mortgage?

1. To lower their payments

This is the most obvious and most common reason that homeowners refinance their mortgages. Reducing your monthly payments is always a welcome benefit. There are 2 different ways that your payments might be lowered with a refinance.

The first is by securing a new loan with a lower interest rate than your initial loan. Interest rates fluctuate year to year, and so does your credit status and borrowing power. If you can qualify for a new loan at a better rate, then you can save yourself quite a bit of money on interest by refinancing to a more advantageous loan. You'll have some fees to cover for closing the loan, but overall, the amount you'll save on interest far outweighs the fees.

Another way people lower their payments is by changing the term of their loan. Your income situation can change over the years. For instance, say you secured a 15-year loan and were comfortable with the payment amount. If your income then changes and you would like to lower your payments, then refinancing to a 30-year loan will help reduce your monthly burden. The downside is that you will end up paying much more interest over the life of the loan. Sometimes, however, that is a necessary trade-off to reduce your monthly payments.

2. To finish their loan faster.

Some people choose to refinance their mortgages to pay off their loans faster. If your income situation has improved and you are comfortable handling a larger monthly payment, then it could be to your benefit to refinance from a 30-year loan to a 15-year loan and reduce the amount of interest you will pay to finally own your house outright. In addition to simply reducing the term of the loan, a lower interest rate might be available depending on the circumstance, thus providing additional benefit.

3. To change their rate type.

When you initially purchased, you might have opted for an adjustable rate mortgage (ARM) loan. With this type of loan, the rate can increase over time, which means your payments, as well as the amount of interest you pay, can go up. Refinancing to a fixed-rate mortgage can lock in a low rate for the life of your loan and save you money in the long term.

4. To pull out some equity.

Another popular reason to refinance is to put some money into your pocket. If your home has increased in value since you took possession, then refinancing it to borrow more than you owe on your current loan means you get to pocket the difference. This can be done in combination with lowering your interest rate for additional benefits.

5. To end their FHA insurance payments.

If you initially purchased your home using an Federal Housing Administration (FHA) mortgage, then you are subject to an FHA mortgage insurance premium that is included in your monthly payments. FHA loans are popular among first-time home buyers and those with less credit history. However, as your credit situation improves, you may qualify for a better loan not subject to FHA insurance, thereby saving you money every month.

If one or more of these reasons sounds like it suits your situation, you might want to look into refinancing your mortgage. The first step is to use a mortgage refinance calculator and input your current loan details and the loan you would like to apply for so that you can compare the potential savings. As with any loan, a refinance will mean paying some loan fees, and this should factor into your decision of whether a refinance is right for you.