Reasons To Refinance
A mortgage refinance is the process of paying off your existing loan and replacing it with a new one. You’ll have several refinance options to choose from. Let's take a look at some of the most popular reasons you might want to refinance.
Lengthen Your Mortgage Term
You can lengthen your mortgage term with a refinance. This gives you more time to pay off your loan and lowers the amount you must pay every month.
Shorten Your Term
You can also refinance to a shorter mortgage term. You increase your monthly payment when you shorten your mortgage term, which allows you to own your home faster and save thousands of dollars in interest.
Take A Lower Interest Rate
Are interest rates lower now than when you bought your home? If so, you can lower your monthly payment and save money in the long term when you refinance to a lower rate. You may also qualify for a lower interest rate if your credit score is higher now than when you bought your home or you’ve paid off other debts.
Change Your Loan Structure
Do you currently have an adjustable-rate mortgage (ARM)? If you’re past the fixed period, the amount you pay in interest each month can vary significantly. It’s possible to refinance from an ARM to a fixed-rate loan that keeps your payment the same every month. This keeps your monthly payments predictable, which can be an asset if you live on a limited budget.
Change Your Loan Type
Many borrowers refinance their government-backed loans to conventional loans as soon as they build enough equity. For example, you must pay a mortgage insurance premium throughout the life of a Federal Housing Administration (FHA) loan if you bring less than 10% for a down payment.
You can cancel private mortgage insurance (PMI) when you reach 20% equity if you have a conventional loan. You can also refinance to a conventional loan if you have an FHA loan with at least 20% equity in your home.
Cash Out Your Equity
A cash-out refinance allows you to accept a higher principal balance and take the difference in cash. For example, imagine that you have a mortgage with a principal balance of $100,000. You want to spend $10,000 to add a pool to your home, but you don’t have the cash on hand.
If you take a cash-out refinance, you’d take on a loan with a $110,000 principal balance. In exchange, your lender would give you $10,000 in cash a few days after you close.
Unlike other types of loans, you can use the money from a cash-out refinance for almost any purpose. Many homeowners take cash-out refinances to pay off debt. This is because mortgage loans have lower interest rates than most credit cards and other loan types.
