Refinancing a mortgage essentially refers to the process of paying off an existing loan by taking a new loan. There are many reasons to refinance your mortgage, but refinancing may not always make sense. Here’s a look at a few good reasons to refinance your current mortgage loan.
Refinancing to Secure a Lower Interest Rate
This is one of the best reasons to refinance your existing loan. If you can reduce the interest rate on your existing loan by at least 1%, you should consider refinancing. Reducing your interest rate not only saves you money but also increases the rate at which you build equity for your home. It can also decrease your monthly payment.
Refinancing to Shorten the Loan Period
When interest rates fall, homeowners have the opportunity to refinance and get a new loan with the same monthly payment but a significantly shorter term.
Converting to A Fixed-Rate Mortgage (FRM)
While adjustable-rate mortgages (ARMs) often start with lower interest rates than those offered by FRMs, periodic adjustments can often result in significantly higher rates. When this happens, converting to an FRM will get you a lower interest rate and, more importantly, there will be no future interest rate increases, whatever be the situation. Keep in mind that converting from an FRM to an ARM can also be worthwhile if interest rates are decreasing and you do not intend to stay in your current home for a long time.
Refinancing to Consolidate Debt
Although replacing high-interest debt with a low-interest mortgage appears to be a good idea, refinancing may not always be a good decision, financially speaking. This is a good option only if you can resist the temptation to spend after being relieved from debt.
To Pay for A Financial Emergency
Another reason to refinance is to meet a serious financial emergency. Even if this is the case, review all your available options for raising funds before you proceed.
Refinancing can be a great decision as long as it reduces your mortgage payment, shortens the term of your loan, or helps you build equity faster. But remember that if you are not planning to stay in the house for more than a few years, the cost of refinancing will be exorbitant when compared to your potential savings.
