The process of home refinancing involves replacing your current mortgage with a new one, which will have different terms than your original mortgage. People typically don't refinance unless the terms of the new mortgage are better than the old one, such as getting a lower interest rate or eliminating the need to pay private mortgage insurance. Here are some reasons that you may want to use home refinancing.
Lower Your Interest Rate
Did you get your mortgage recently and see the interest rates suddenly drop? Getting a new mortgage with a low-interest rate may be beneficial to lower the amount of money you owe over the loan's lifetime. Keep in mind that a small decrease in the interest rate can often have a big impact on your overall savings, especially if you are near the beginning of the loan and are still paying mostly interest.
Lower Your Monthly Payment
Sometimes the goal of refinancing is not to reduce how much you spend overall, but to reduce the amount that you owe each month. This can be necessary if someone in your household loses their job or becomes disabled, and you can no longer pay your current mortgage payment. You essentially start the loan over again, but you will be borrowing much less money which results in a lower monthly payment.
Just remember that those initial payments after refinancing will mostly be made of interest due to the amortization schedule. It may not be worth it to lower your monthly payment if you plan to sell in the near future, because you will not build much equity during the first few years of the mortgage.
Shorten The Loan's Term
Did you originally get a 30 year mortgage, and now you can afford a 15 year mortgage with a higher monthly mortgage payment? Now may be the time to refinance to shorten the term of the loan. You can combine this with not only taking advantage of lower interest rates, but how interest rates are even lower when you shift from a 30 year mortgage to a 15 year mortgage.
Debt Consolidation
One of the cheapest ways to borrow money is through a home mortgage. If you have existing debts that you pay a high interest rate on, such as credit card debt, it may not make sense to hold onto your other debt. Refinancing allows you to take out a new loan at the low interest rate offered through a mortgage, and pay off the high interest loans that are racking up a lot of interest.
