When you refinance your home, you pay off your current mortgage and replace it with a new loan that has a lower interest rate or better terms. Should you refinance your home loan? Here are 6 reasons homeowners consider when refinancing their current mortgage.
1. To save money on interest
When lower interest rates are available, you can refinance to a better rate and save money on interest. You'll want your new rate to be substantially lower than the rate on your current mortgage, so that refinancing makes sense after you pay the closing costs that may be required. Use our refinance calculator to estimate your potential savings.
2. To lower your monthly payments
You can also refinance to lower your monthly payment. In this case, you use the money you save on your mortgage to help pay other bills or expenses. Look at the impact of lowering your monthly payment on the total amount of money you might pay in interest, however. By refinancing, the total finance charges you pay may be higher over the life of the loan.
3. To get cash from your home equity
Another reason to refinance your home is to get cash from your home's equity. This is called a cash-out refinance. You replace your existing mortgage with a new loan for a higher amount, and you get the difference in cash at closing.
Some homeowners use cash-out refinances to help them pay down other higher interest debt. You can also use the money to pay for things like home improvements, college education, or other major expenses. Like other refinancing, you typically have to complete a new mortgage application and pay a new set of closing costs.
4. To shorten your loan term
Another reason to refinance your mortgage is to save money by paying off your loan sooner. If you have 25 years left on your home loan, you might refinance to a 15-year mortgage. This might save you money because you are paying down the principal faster, which means you will pay less interest over the life of the loan.
Keep in mind that shortening the life of your home loan might increase the amount you are required to pay each month. Also remember that refinancing is not usually necessary to pay off your home loan sooner. You might choose to just make extra mortgage payments instead. Before you make extra payments, check your loan terms to make sure you don't have a pre-payment penalty. Freedom Mortgage home loans do not have pre-payment penalties.
5. To make your monthly payments more predictable
Homeowners who have an adjustable rate mortgage (ARM) sometimes refinance to a fixed rate mortgage because they want the peace of mind of knowing that their monthly mortgage payments won't change.
For example, many homeowners have 5/1 ARM loans, which means the interest rate stays the same for the first five years of the mortgage and afterwards may adjust once a year. Toward the end of the introductory period, these homeowners might decide it makes sense to refinance to a fixed-rate mortgage and make their mortgage payments more predictable.
6. To remove mortgage insurance
Finally, homeowners can refinance to stop paying mortgage insurance. With a conventional loan, you can usually remove private mortgage insurance (or "PMI") without refinancing. Most homeowners can stop paying PMI when their home's equity reaches 20% and lenders are typically required to remove PMI when a home's equity reaches 22%.
With an FHA loan, the rules for mortgage insurance are different. If you've gotten an FHA loan in the recent past, you will have to pay mortgage insurance premiums (or "MIP") for at least 11 years. And depending on the amount of your down payment, you may have to pay MIP for the life of the loan. In these cases, you could refinance your FHA loan to a conventional loan to stop paying mortgage insurance premiums.
Is it worthwhile to refinance your home?
Interested in learning how much money you might save by refinancing your home loan? Use our refinance calculator to estimate your savings. Our calculator considers interest rates, closing costs, loan terms, and other factors to estimate how much money you might save and what your new monthly payment might be.
When you have a VA or an FHA loan, also check to see if you qualify for streamline refinancing. VA streamline refinances (also known as "IRRRLs") let you lower your interest rate with less paperwork and faster closings. You can enjoy similar benefits with an FHA streamline refinance. You can only streamline refinance an existing VA loan into a new VA loan or an existing FHA loan into a new FHA loan. There are eligibility and other requirements you will need to meet as well to get your loan approved.
Refinance your home loan with Freedom Mortgage
Interested in refinancing your mortgage but don't know where to start? Freedom Mortgage Loan Advisors are happy to answer your refinancing questions! Visit our Get Started page or call us today at 877-220-5533.
Freedom Mortgage Corporation is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Consult a financial advisor before making important personal financial decisions.
Last reviewed and updated July 2022 by Freedom Mortgage Corporation.