If you’ve been in your home for a while, you may be asking yourself: Should I refinance my mortgage? Before you make any decisions, consider a few questions; the answers could help you save time and money.
What are common reasons to refinance?
To lower your monthly payment, interest rate or both: According to a recent AAA Consumer Pulse Survey, this was the motivation for more than 75% of respondents who would consider refinancing their homes. Generally, if you can lower your interest rate by at least a 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. If you don’t plan to stay in your home more than a few years, refinancing might not make sense.
To get cash from the equity you’ve built: A cash-out refinance could let you pay off credit cards or other high-interest loans, or it could allow you to fund a child’s education, a home remodel or another major expense. Just remember that when you refinance to pay off debt, that debt doesn’t go away—it just gets redistributed.
To change the length of your loan: 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 and pay off your home five years sooner. Plus, if a shorter loan comes with a lower interest rate, your new monthly payment could be similar to what you’re paying now.
To change the loan type: With an adjustable-rate mortgage, monthly payments change as the interest rate changes. 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 have only 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.