Stop me if you've heard this before – mortgage rates are lower than ever. Over the past 10 or 15 years, mortgage rates have come down. Every time they hit a new low everyone thinks, "Wow, I have to refinance – interest rates will never be this low again!" And interest rates keep falling. When considering refinancing your mortgage, there are five reasons to consider.
# 1 To get a lower interest rate
Even if you refinanced relatively recently, refinancing again can serve you well, even if you are still in the same house. If interest rates have continued to fall, refinancing may lower your interest rate, which will likely lower your monthly payment. That extra money every month can be put to good use by paying off debts or creating an emergency fund.
# 2 To shorten your mortgage term
Another good reason to refinance your mortgage is to shorten the term of your mortgage. Every year that you still pay back your mortgage, you pay thousands of dollars or more in interest. Moving from a 30 year to a 15 year mortgage can save tens of thousands, if not hundreds of thousands, of dollars in interest over the course of the loan.
As you shorten the term of your mortgage, your monthly payment increases due to the lower number of total payments on your loan. However, the interest rates on a 20-year mortgage are typically lower than those on a 30-year mortgage, and the 15-year interest rates are usually even lower. Therefore, the lower interest rates will often offset the increase by shortening the term and keep your monthly payment amount roughly the same. Use our free loan calculator to get the numbers and see what makes the most sense for you. Make sure the refinancing comes with some upfront costs that you will have to pay out of pocket or add to your loan.
# 3 Get rid of PMI
Another important reason to refinance your mortgage is to get rid of private mortgage insurance (PMI). PMI is often used when you have less than 20% equity in your home. If you're still paying PMI and your home has grown in value to the point that you now have more than 20% equity, a refinance may be a good idea to stop paying PMI on top of your regular monthly mortgage payment.
# 4 To convert to an adjustable rate mortgage (ARM)
Another reason to refinance your mortgage is that you currently have an adjustable rate mortgage (ARM). A variable rate mortgage is a mortgage whose interest rate can vary over time. With interest rates this low, it can make sense to set a low fixed rate so you don't have to worry about interest rates rising in the future.
# 5 To capitalize on your home's equity
If you have a significant amount of home equity, you can consider putting some of that equity in other areas of your life. While it's not a good idea to find out the worth of your home equity on a weekend trip to Vegas, there are many reasons you might want to take advantage of your home equity. This could be doing major home improvement, paying for college education, paying off debts, or other major expenses.
One way to do this is through a withdrawal refinance. With a disbursement refinancing, you refinance a loan with a higher principal amount. After paying back the balance of your existing mortgage loan, you can use the remainder for any reason. Another way to get cash out of your home equity is through a home equity line of credit (HELOC). A home equity line of credit accomplishes many of the same goals as a withdrawal refinance, but in a slightly different way. Check out our article comparing the two to see which one might be right for you.
READ MORE: Home Equity Loan Vs. Disbursement Refinancing
One reason not to refinance your mortgage
Just because you can refinance your mortgage doesn't always mean that you should refinance your mortgage. In general, it is not a good idea to refinance your mortgage just to lower your monthly mortgage payments. Lowering your monthly mortgage payments is often a side effect of refinancing. However, if you don't have any of the above reasons, it might not be a good idea.
There are two reasons why refinancing your mortgage just to lower your monthly payments may not make sense. First, the additional closing and other costs you pay with a refinance can add thousands of dollars to your principal. In addition, lowering your monthly payments often means extending the life of your loan. You may be paying tens of thousands of dollars more in interest.
Dan Miller (37 posts)
Dan Miller is a freelance writer and founder of PointsWithACrew.com, a website that helps families travel for free / cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 children.