Refinancing means replacing your current mortgage with a new one. People do it for different reasons. Here are the most common ones, along with what to weigh before you decide.
1. To lower the interest rate
If market rates are lower than your current rate, a refinance could reduce your payment and your total interest. As an illustration, on a $300,000 loan over 30 years, a 1-point lower rate (7% versus 6%) would reduce the monthly payment by about $197. The numbers are for illustration only and are not an offer.
2. To lower the monthly payment
A lower rate or a longer term can reduce the payment. A longer term, however, can increase the total interest you pay.
3. To shorten the loan term
Some homeowners move from a 30-year to a 15- or 20-year loan to pay it off sooner and reduce total interest. The monthly payment is usually higher.
4. To switch from an adjustable rate to a fixed rate
If you have an ARM and prefer predictable payments, a fixed-rate refinance can add stability.
5. To take cash out of your equity
A cash-out refinance lets you borrow against the equity you have built, for example for home improvements or to pay off debt. It increases your loan balance, and your home secures the new loan.
6. To remove mortgage insurance
If you pay PMI and your home value has risen, a refinance may help you remove it. In some cases you can ask your servicer to cancel PMI without refinancing, so ask about that first.
7. To consolidate debt
Some owners use a cash-out refinance to pay off higher-interest debts. This converts unsecured debt into debt secured by your home, so consider the risks carefully.
Before you refinance
- Estimate the closing costs and how long it takes to recover them
- Compare the new loan with what you have today, including term and rate
- Make sure the new loan fits your plans for how long you will stay
- Ask for a Loan Estimate to compare offers
Refinancing is not always the right move. A good lender will run the numbers on your current loan first, and tell you if staying put makes more sense.
Every borrower is different. If you would like to talk through your own situation, the MonaLending team is happy to help.
