Why Refinance?

in First Person: Our Blog, Interest Rates, Mortgage, Personal Finance

There are lots of reasons homeowners just like you refinance a mortgage loan. Does one or more of these apply to you?

  1. Lower your mortgage rate and reduce your monthly payment
    Are mortgage rates lower now than they were when you first bought your home? As rule of thumb, it may make sense to refinance your mortgage if you can lower your interest rate by 1% or more – from 6.0% to 5.0%, for example. If you have a high mortgage balance, say $250,000 or more, you may benefit from a rate reduction of less than 1%. On the other hand, if your mortgage balance is lower than $250,000, you may need to see a greater than 1% rate reduction to realize a tangible benefit. Bear in mind, you may incur closing costs when you refinance your mortgage. Will you save money by refinancing now?

    Also, pay careful attention to the remaining term of your existing mortgage. For example: If you have 10 years left on your existing mortgage and you refinance to a 30-year term, you just added 20 years to time it will take to pay off the loan. Even if the monthly payment is lower, your total interest paid over the life of the loan may be more.

  2. Shorten the term of your loan and reduce interest expense
    Shorter term mortgages usually have lower rates than longer terms; a 15 year fixed rate mortgage can have a rate that is 0.50% to 1.0% lower than a 30-year fixed rate. Refinancing from a 30 to a 15-year term may cause your monthly payment to go up. However, if you can afford the increase in payment, you could save thousands of dollars in interest and have your house paid off much sooner. Fixed rate mortgages usually come in 10, 15, 20, 25, and 30-year terms.
  3. Remove a co-borrower
    You may consider refinancing to remove a co-borrower from his or her obligation to pay the existing mortgage payment. This is common in divorce situations.
  4. Cash out equity
    If you have enough equity in your home, you may qualify for a cash-out refinance. You may use the cash to pay for college, pay off existing debts, or for home improvements.