Why You Might Consider Refinancing Your Home Loan
There are several reasons why refinancing might be right for you. Usually, borrowers refinance their home for one or more of the following reasons:
Lower your monthly mortgage payment: The main reason to refinance is to lower your monthly payment. You can lower your monthly mortgage payment by taking out a new loan at a lower interest rate, or by taking out a longer-term loan.
Lower your overall costs: Another reason is to lower their borrowing costs by taking advantage of the lower interest rate. Therefore, more people are refinancing their home loans when interest rates are low.
Reduce your risk: Refinancing can also be used as a risk management tool. For example, if your original home loan is an Adjustable-Rate Mortgage (ARM), you could refinance to a Fixed Rate Mortgage to protect yourself against sudden rise in interest rates when the initial discount period expires.
Raise cash: Refinancing can also be used to unlock your home equity and gain access to cash. This is called a cash-out refinancing. Specifically, you are taking out a larger loan than you currently owe and keeping the difference in cash — essentially borrowing more money against your home. Money raised from refinancing could be used for different purposes; for instance, for home renovation, to pay off high-interest debts such as credit card debts, to pay for major expenses, or investment purposes.
Shorten your mortgage term: Refinancing is not always about lowering your monthly payment. If you are earning more than you used to, it may be worthwhile to convert your longer-term mortgage to a 15-year loan. This is generally better than prepaying the loan because 15-year loans have lower interest rates than a longer-term loan. This will help you pay off your home loan much faster and save you tens of thousands of dollars in interest payments.
Eliminate Private Mortgage Insurance (PMI): If your equity increased above 20% due to the rise in your home value, refinancing could be an option to get rid of your PMI if you cannot persuade your lender to drop the mortgage insurance. Getting rid of your PMI could save you hundreds every month.
It also pays to remember that a savvy homeowner is always looking for ways to reduce debt, build equity, save money, and eliminate their mortgage payment. Taking cash out of your equity when you refinance does not help to achieve any of those goals.