When you refinance your mortgage you get a new loan to pay off your existing loan. The most common reasons people refinance their home is to get a lower rate, lower their monthly payments, or both. Depending on the type of mortgage you have and your financial situation, there are multiple benefits to refinancing, and reasons why it could make sense for you.
Benefits of Refinancing a Home:
Here are some of the ways a new mortgage might make financial sense for you:
- You can get a lower interest rate. Lowering your interest rate can lower your monthly payments, and you'll pay less money toward interest over the life of the loan. Either way, you'll have more money to spend, or save, every month.
- You can get a shorter home loan term. This will help you pay off your mortgage sooner. With a shorter term, and a lower interest rate, more of your monthly payments will be applied toward principle, which will also help you build equity faster.
- You can change from an adjustable-rate (ARM) to a stable fixed-rate loan. Switching to a fixed-rate mortgage with predictable monthly payments means you won't have to worry about the eventual rate and monthly payment increase — which can be substantial.
- You can turn your home's equity into cash. Cash-out-refinancing lets you turn your home's equity into cash you can use however you want.
Reasons to Refinance a Home:
No two home mortgages, personal or financial situations are ever the same. Neither are the reasons why people choose to refinance their house. Here are some of the ways it might help you.
- You need money for planned or unplanned expenses. Cash-out refinancing can get you the funds you need to cover all types of expenses. It's most commonly used to pay off high-interest credit cards, making home repairs, paying for college or medical expenses, even taking a dream vacation.
- Your household income has gone up. If you have a new, higher, and steady source of income, refinancing could allow you to apply more of your income toward your loan principle each month to pay off your loan sooner.
- You need help creating a stable home budget. Mortgage payments are a large, regular expense. Reducing your monthly payments can give you extra spending money, and some financial breathing room every month.
- Your house needs to be remodeled, repaired or upgraded. Refinancing could help you get access to the cash you need to affordably make much-needed repairs or renovations without taking out a separate loan, likely at a higher interest rate.
- Your personal life has changed. Life is full of expected and unexpected challenges. Whether it's marriage or divorce, medical emergency, or other bills, refinancing can give you financial flexibility to respond to almost any event.