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Homeowners refinance for many reasons. Before you
decide if and when to refinance your mortgage, you should
consider the following:
- your reasons for refinancing.
- the interest rate of the existing mortgage.
- the interest rate of the new mortgage.
- the cost of refinancing.
- how much equity you have built up in your home.
- your current income and credit status.
To
Get a Lower-Interest-Rate Mortgage
One of the main reasons homeowners refinance their
mortgages is to take advantage of lower interest rates.
For example, suppose you have a
fixed-rate mortgage, but
interest rates have declined since you first obtained
your loan. You may find that now you can get a new loan
at a lower rate of interest. You can reduce your monthly
payments when you refinance from a higher rate loan to one
with a lower rate. If you plan to remain in your home for
several years, the savings you will realize in the form
of a lower monthly mortgage payment could justify the
costs of refinancing your home.
To Build Equity
Faster
Many homeowners want to build the equity in their
homes more quickly and choose to refinance from a longer term
mortgage to one with a shorter term. That’s because
each month a certain part of your payment goes to the
interest expense on your loan, with the remainder being
applied against the principal, or loan balance. With
shorter term loans, a greater percentage of your monthly
payment goes to the principal. For example, if you
currently have a 30-year fixed-rate loan, you might
consider refinancing to a 10-, 15-, or 20-year loan,
which will lower the total amount of interest you will
pay over the life of the loan and speed up the growth of
equity in your home.
You can use the monthly payment calculator to
compare how much your mortgage payment and your total
amount of interest will be for loans at a variety of
terms. Go to the How Much Is Your Monthly Payment?
calculator.
To
Switch from an Adjustable-Rate Loan to a Fixed-Rate Loan
During those times when interest rates are higher,
homeowners often choose adjustable-rate mortgages,
which traditionally offer lower interest rates during the
early years of the loan than fixed-rate loans. When rates
come down, you may want to refinance to a fixed-rate
loan, which provides the stability and predictability of
knowing exactly what your mortgage payment will be for
the life of the loan.
To Switch from a Fixed-Rate Loan to an Adjustable-Rate Loan
There are instances when a homeowner may wish to refinance from a fixed-rate to an adjustable-rate mortgage (ARM).
For example, if you feel constrained by the expenses of your current mortgage, you could refinance to an
ARM to gain the benefits of lower payments. Remember, however, that the interest rate on an ARM
can increase at its periodic reset date, which means that your reduction in monthly payment amount may only
be for a limited time. However, if you plan to live in your home for only a short time and then
sell, refinancing from a fixed-rate to an adjustable-rate mortgage may make sense.
To Draw
on the Equity Already Built Up in Your Home
Through what is often referred to as a “cash-out” refinance,
you can tap the equity that has accumulated in your home
to pay for expenses such as the education of your
children and home improvements. For example, if your
home is now valued at $150,000 and your loan balance is
$80,000, you might be able to get a new $112,500 mortgage
(cash-out refinances generally are limited to 75 percent
of the total value of your home). That would allow you to
repay the existing $80,000 balance and use the $32,500
for other financial needs.
You can use the monthly payment calculator to
compare how much your mortgage payment and your total
amount of interest will be at different mortgage amounts.
For example, you can compare the amount of your current mortgage versus
your proposed cash-out refinance mortgage amount.
Go to the How Much Is Your Monthly Payment?
calculator.
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