5 Potential Reasons to Refinance Your Mortgage

There may come a time during the course of your mortgage when it makes sense to refinance. As exciting as it is to envision getting a serious chunk of change in a cash-out refinance — and maybe even spending it on the shopping spree of a lifetime or a plane ticket to faraway — it only makes sense to refinance if it benefits you financially in the long run. We see Mortgage Memes used by mortgage lenders encouraging people to take loans.

After all, you’ll have to jump through the same hoops you did the first time around — namely getting approved and paying certain fees — so you want to be really sure it’s a smart idea.

Here are five potential reasons to refinance your mortgage.

#1: To Lower Your Interest Rate

Mortgage rates may have fallen since you initially signed the papers. So, it may make sense to refinance if you can get a lower rate. Be aware you will have to pay certain costs, such as:

• Origination fees
• A credit check
• An appraisal
• Closing costs
• Possible early repayment penalty

As NerdWallet notes, you can expect closing costs to be between two and five percent of your total loan amount. You’ll need to weigh these expenses against your potential savings to determine whether it’s worthwhile to refinance. Also check in on how long you plan to stay in your home; refinancing generally only makes sense if you’re going to stay put for as long as it takes to justify the closing costs.

#2: To Shorten the Length of Your Loan

A 30-year mortgage can start to feel like a long time. There’s a chance you can refinance to shorten your loan term without bumping up your monthly payments by too much when interest rates fall.

Here’s an example from Investopedia: Your $100,000 home has a 30-year fixed mortgage at nine percent. If you can refinance to 5.5 percent, you can turn it into a 15-year mortgage and only increase your monthly payments by about $13 to $817.08.

#3: To Consolidate High-Interest Debts

If you’re dealing with other high-interest debts on top of your mortgage, a cash-out home refinance is one way to consolidate. You will need to have equity built up in your home to go this route.

Here’s how it works: You’ll replace your current mortgage with one for a higher balance, then receive the difference in cash. You use this cash to pay off your high-interest loans — like credit cards and medical bills — in one fell swoop. Then you’ll be responsible for paying back your adjusted mortgage over time without the need to juggle those high-interest debts, too.

Since your home is secured as collateral, make sure you’re totally prepared to repay your mortgage for the new, longer timeframe if you do conduct a cash-out refinance.

#4: To Eliminate Private Mortgage Insurance

If you’ve been required to carry private mortgage insurance because your down payment came in under 20 percent of the home’s value, you may be in a position to refinance and eliminate it — potentially saving you hundreds of dollars per month.

The magic number here is 80 percent. If your home is more valuable than when you first bought it and you owe less than 80 percent of its worth, you can likely refinance and ditch your PMI.

#5: To Make Home Improvements

Has your home been begging for a new roof? Improved HVAC? A kitchen renovation? Revamped bathrooms? Using a cash-out refinance to secure the funds is one way to upgrade your home and improve its value for when you want to sell it.

Keep an eye on mortgage rates and run the numbers to determine if it’s a savvy move to refinance — you could just end up saving some money, reducing the length of your mortgage or securing the cash you need to consolidate debts or improve your home.