If you are struggling to make your monthly mortgage payments or your existing mortgage interest rate is higher than current market rates, you may want to consider refinancing your home.
While this process isn’t without fees and risks, it can be what keeps some people in their homes or betters their finances in the long run. Read on to learn whether refinancing might be right for you.
What is refinancing?
Refinancing is the act of taking out a new mortgage on your home. According to the Federal Reserve, “When you refinance, you pay off your existing mortgage and create a new one. You may even decide to combine both a primary mortgage and a second mortgage into a new loan.”
Reasons to consider refinancing:
1. Lower interest rate
If the market has changed and rates are now lower than when you first got your mortgage, or if your credit has become much better since then, you can refinance to get a lower interest rate.
Because you will be paying less in interest each month, the amount you owe each month will go down, too.
2. Go from ARM to fixed rate
Do you currently have an adjustable rate mortgage (ARM)? Signing up for this type of variable loan when you’re shopping for a mortgage is appealing because the rates are usually the lowest.
However, when the market changes, you may be in for an increase. If you have good credit, you can refinance to switch from an ARM to a more stable fixed rate.
3. Change your term
When refinancing, you can change your term to longer or shorter depending on your needs. If you go up to a longer term, such as 30 years, your monthly payments will go down.
However, you will end up paying more interest in the long-term. For some people, that’s worth the trade-off.
You also can refinance to a shorter term, which will have a lower interest rate, but your monthly payments will likely increase.
4. Cash out on equity
If you have an emergency expense or need to consolidate credit card debt, you can do cash-out refinancing to access the equity you’ve built in your home.
“When you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment,” according to the Federal Reserve.
5. Get rid of PMI
When you purchase a home and put less than 20 percent down, lenders usually require private mortgage insurance (PMI) to protect themselves in case you default on the loan.
If your home value has increased and the balance you owe has decreased, you may be able to have your PMI canceled by refinancing.