Situations Where You Should Refinance Your Mortgage


Mortgage refinancing can seem like a great idea when interest rates are down and your mortgage balance has gone down with them. But not all situations are right for refinancing, and in fact, you may even lose money if you refinance into the wrong loan product with the wrong lender. So to make sure you’re doing the right thing, let’s look at some situations where it’s appropriate to refinance your mortgage.

If You Have an Adjustable Rate Mortgage (ARM)

If you have an adjustable-rate mortgage (ARM), you can refinance mortgage to get a more favorable interest rate. This will save you money, especially if rates go up during your first few years of ownership.

To Shorten Your Loan Term

If you’re considering refinancing your home mortgage, one of your best options is to shorten your loan term. The average monthly payment on a 30-year fixed-rate mortgage is about $733 a month for every $100,000 borrowed.

To Lock in Current Rates With an Arm

If you currently have an adjustable-rate mortgage (ARM), you may want to lock in current rates with refinancing. This could be a good idea if interest rates go up.

A Lender is Offering Extra Incentives to Refinance

When weighing whether or not to refinance, one thing to consider is what sort of incentives a lender might be offering. They include:

  1. A lower interest rate
  2. A lower closing cost
  3. An increased loan amount
  4. A cash-out option
  5. A lower monthly payment
  6. No prepayment penalty
  7. A shorter-term (less than 30 years)
  8. Lower payments for up to five years
  9. Zero points
  10. A deferred second mortgage
  11. An extended amortization period
  12. Waiving private mortgage insurance
  13. A reduced interest rate on your home equity line of credit

If you’re planning on staying in your home for a long time, refinancing just to get some cash out of it probably isn’t worth it. But if you have an immediate need, such as paying off credit card debt or buying a new car, then it might be worthwhile.

To Avoid Paying Mortgage Insurance

In most cases, you’ll have to pay mortgage insurance when you refinance with less than 20% equity in your home. This is a good reason to wait until you have at least a 20% down payment before refinancing. Keep in mind that if you put less than 20% down on your original loan, you will need to buy private mortgage insurance (PMI) for as long as you have that loan – even if it’s for just one month or one year.

To Pay Off High-Interest Credit Cards Or Other Debts

If you have low-interest credit card debt or other high-interest debt, it may be a good idea to refinance your mortgage to pay off those debts. This will allow you to save money on interest payments and free up cash flow for more important investments.

You’re Buying Another Home

If you’re looking to buy a new home, refinancing could be a great option. Unfortunately, the interest rate on your current mortgage will likely be higher than what you’d get from a refinance. But it’s worth considering if it’s more than three percentage points lower.

According to the experts at SoFi, “You could get a shorter term, lower monthly payments, or get a cash-out to refinance loan on your home’s equity.” Before refinancing your mortgage, consider why you are doing it and what you expect to gain. If you can answer these questions, refinancing might be a good idea.

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