7 Excellent Reasons To Refinance Your Home Loan

Purchasing a home is an exciting and rewarding experience. Searching for the perfect place, imagining life in your new space, the list goes on and on. Getting your mortgage can be a little less desirable, but it's incredibly crucial to securing your new abode.

Once you close on your home, it may be tempting to take a break from the documentation, financial inquiries and other somewhat stressful tasks associated with your home mortgage. Don’t forget about it for too long though, as it’s a good idea to take a second look at your mortgage and consider some of the many good reasons to refinance your home.

What Are Some Good Reasons To Refinance Your Home?

Right now you may be wondering, "should I refinance?" As a homeowner, there are a number of factors you’ll want to consider. Depending on your financial needs and goals, the type of home loan will be the biggest factor when you are deciding what type of refinance is right for you.

Some of the key reasons people decide to refinance their home include locking in a lower interest rate compared to their current mortgage, switching from an adjustable-rate mortgage to a fixed-rate mortgage, changing their mortgage term (making it shorter or longer), getting rid of private mortgage insurance, canceling FHA mortgage insurance premiums, paying off credit cards and other high interest debt, or financing home improvements or renovations.

Let’s take a closer look at these 7 excellent reasons to refinance your home loan.

1. Lock In A Lower Interest Rate

One of the biggest factors that affects how much you pay for your home each month is mortgage interest rates. Depending on your rate, your monthly payment can dramatically swing higher or lower. Interest rates are still low but have risen in the past several months. Locking in a lower interest rate is a good reason for refinancing, because it can reduce the amount of overall interest you pay over the course of your loan and reduce your mortgage bill each month.

Other benefits of lowering your interest rate include building home equity more quickly with less money and having more liquidity to contribute to a retirement or other long-term savings account.

2. Switch An ARM To A Fixed-Rate Mortgage

An adjustable-rate mortgage (ARM) is a home loan where the interest rate is - you guessed it - adjustable. These usually start with a low rate that is fixed for a certain period of time and then change to a rate that can fluctuate depending on market conditions.

A fixed-rate mortgage, as you also might have guessed, is fixed for the entire term of the loan. This means your rate won’t change as market conditions and interest rates fluctuate.

Refinancing to convert an ARM to a fixed-rate mortgage can be beneficial for homeowner’s, especially in a market where interest rates are expected to rise during the term when your ARM becomes adjustable. If you have an ARM, you can refinance it to a fixed-rate mortgage to prevent your interest rate from jumping up and increasing your monthly home loan payment.

3. Change Your Mortgage Term

The term of your loan references the amount of time it takes you to pay it off completely if you simply made your minimum mortgage payments each month. Most commonly, borrowers select a mortgage loan with a term of 15 or 30 years.

When refinancing, you can select a shorter term loan than your current mortgage or a longer term loan than your current mortgage. There are benefits and drawbacks to each, so it’s important to know the pros and cons so you can make the best decision for your individual situation.

• Shorter loan term: Shortening a loan term from a 30-year to a 15-year mortgage has a number of advantages for borrowers, and drawbacks as well.

 Pros

• You’ll build home equity and pay off your home faster.
• You may benefit from a lower interest rate.
• You’ll pay much less interest over the life of the loan.

Cons

• You’ll pay a higher monthly payment.
• You may not be able to comfortably afford the home you want.
• You’ll have less liquidity because more of your money will be in your home faster.

• Longer loan term: Refinancing to lengthen a mortgage term from 15 to 30 years can help borrowers who need to lower their monthly mortgage payment. However, lengthening a loan term from 15 to 30 years will result in paying more mortgage interest over time. Here are the pros and cons of a longer term loan.

Pros

• You’ll have lower monthly payments.
• You’ll have more money (liquidity) left in your budget.
• You can afford your home more comfortably.

Cons

• You’ll pay a higher interest rate.
• You’ll pay more in interest over the life of the loan.
• You’ll build home equity more slowly.

4. Get Rid Of Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is a type of insurance often required for a conventional loan when the borrower puts down less than 20% of their home’s purchase price for their down payment.

Homeowners that make smaller down payments are considered riskier to lend to than those that make down payments of at least 20% because they have less equity in the home. This means lenders require PMI to insure their investment (the loan).

Why refinance to get rid of PMI? Well, PMI adds to your monthly payment each month, so getting rid of it saves you money. Once you hit 20% equity in your home by making payments, you can request that your lender cancel your PMI.

5. Cancel Mortgage Insurance Premiums (MIP)

Mortgage insurance premiums (MIP) are fees that high risk borrowers pay each month when they have a Federal Housing Administration (FHA) loan. Refinancing an FHA loan to a non-FHA mortgage is the only way to cancel MIP.

6. Pay Off Credit Cards And Other High Interest Debt

When you have home equity built up, you can use a cash-out refinance to use your home equity to pay off high-interest debt at a lower interest rate. When the new mortgage rate is lower than the credit card or other loan interest rates, you will save money.

7. Finance Home Improvements or Renovations

Borrowers can also use a cash-out refinance to fund a home improvement project or renovation. Using a cash-out refinance is usually a better idea than using a credit card, taking out a personal loan, or securing a home improvement loan. This is because the interest rates for cash-out refinances are often lower than these other types of loans. In addition, when you refinance to make improvements to the home you are increasing the home’s value.

The Bottom Line

Refinancing your home loan can come in many shapes and sizes, and it’s not one-size-fits-all. Research all the options, think about your current financial situation and goals, and then get started on a refinance today!