Is It the Right Time for a Home Mortgage Refi?

Is It the Right Time for a Home Mortgage Refi? Dan Page/

Refinancing your home’s mortgage can be a financial win, but it does come with some cautions. Here are four common reasons to refinance your mortgage—and how to know if it’s the right move for you.

1. To get a lower interest rate

Generally, if you can lower your interest rate by at least a quarter to a half percentage point, then it might be a good time to refinance. You’ll have a lower monthly payment, and you’ll build equity in your home faster because you’re paying more toward principal and less toward interest. Keep in mind: There are fees for refinancing, and it can take time to recoup those costs with the savings generated by a lower interest rate. If you don’t plan to stay in your home more than a few years, refinancing might not make sense.

2. To get a different type of loan

If you’re a few years into an adjustable-rate mortgage, your interest rate may have risen. A refinance gives you the chance to move to a fixed-rate mortgage with a lower interest rate—which won’t change over the life of the loan. On the other hand, if you only have a few years left on your mortgage, refinancing for another 15 or 30 years is probably unwise—no matter what the new loan terms are.

3. To shorten the length of your loan

Refinancing a home basically means transferring the balance of your current mortgage to a brand-new mortgage. Switching to a shorter loan will allow you to pay off your home faster. For example, if you have 20 years left on a 30-year mortgage, you can refinance with a 15-year mortgage instead and have your home paid off five years sooner. As long as you’re getting a lower interest rate, your new monthly payment should be similar to what you’re paying now.

4. To pay off other debts

Many homeowners refinance to get cash from the equity they’ve built in their home. They use it to pay off higher-interest loans or credit cards or to fund a major expense, like a renovation or college tuition. Just remember that when you refinance to pay off debt, that debt doesn’t actually go away—it’s just been redistributed. But with a lower interest rate, you can pay it off faster and with a lower monthly payment.

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