Are you pondering over the idea of refinancing your mortgage? Refinancing your mortgage means you replace your existing mortgage with a new one. There are two main types of refinancing: Rate-and-term refinances, and Cash-out refinance. The major reason for refinancing is to save money on your existing mortgage. However, all homeowners have their individual reasons for refinancing. But refinancing is not always the right choice. Before you think about mortgage refinancing, it makes sense to have a clear understanding of your financial situation and objectives. This will help you understand that the fee you’ll pay for the mortgage approval process again will benefit you in the future. Research is crucial to ensure that this step will improve your overall financial picture.
When it comes to mortgage refinance, you have the freedom to choose any mortgage lender. There’s no compulsion to stick to your current lender. However, before you pick a new lender, make sure to shop around, just like you (hopefully) did when you first got your mortgage. Now, if you’re wondering whether refinancing is right for you or not, here are the key reasons to refinance your mortgage. Read further to know why people decide to refinance their mortgages.
Lower Mortgage Interest Rate
The most common and wisest reason to refinance is to lower your mortgage rate. When the current interest rate on your loan is higher than what’s being offered today in the market, then refinancing makes sense. In this situation, refinancing will lower your monthly mortgage payment. Even if you can reduce your interest rate by 1% or 2%, this will free up cash for other uses or just make daily living a bit more comfortable.
Shorten the Term of Your Loan
You may also choose to refinance to change your loan term, especially if you want to shorten your loan term from 30 years to, say, 10 or 15 years. People consider shortening their loan term because shorter-term mortgages typically have lower interest rates. This is because, unlike longer-term loans, here you’ll be paying back the loan in less time. However, shortening the loan term also means that your monthly payment will likely go up. But even though you may not see a payment reduction every month, the overall amount of interest paid will be reduced. This can be a good reason to refinance when your financial condition has improved.
Refinance to Change Loan Type
Many people choose to refinance to convert their Adjustable Rate Mortgage to a Fixed Rate. This happens because ARMs carry a lower introductory interest rate, but this rate readjusts at a specific time, depending on market condition. These periodic adjustments can result in higher rates than the rate available through a fixed-rate mortgage. So when rates on ARM go up, you may need to convert your mortgage to a fixed-rate that carries a low fixed rate, and this interest remains the same for the entire mortgage term. Conversely, you may want to convert your loan from a fixed-rate loan to an ARM if interest rates fall.