More often than not, home buyers get some kind of home financing to buy a place for themselves. Even if they got a good deal with the lender at the time, they might think of refinancing their mortgage somewhere down the line.
If you’re thinking of this as well, then you first need to think if you have a good enough reason to refinance your mortgage.
For instance, refinancing your mortgage just to buy a new car or get an RV for summer family trips may not be a good idea. It could put you in a lot of financial trouble later on.
However, there are plenty of good reasons to refinance as well. To give you an insight, here are some reasons to refinance your mortgage.
Exchange Home Equity for Cash
Most people choose to refinance their mortgage to free up some cash from the equity they built up in their homes. However, you should have a good plan for the cash.
For instance, you could use the cash to pay for a home expansion or a major home renovation to increase the value of the property. This would be better than getting a personal loan with a high-interest rate.
If you’re refinancing to pay for your kid’s college tuition, on the other hand, then you should compare the interest rates with those of various student loans. With some, you might be better off getting a student loan than refinancing.
Shorten the Loan Term
One good reason to refinance your mortgage is to shorten the loan term.
When you’re looking into mortgages, you can find an option to refinance with a shorter term if your income has increased and you can afford the extra monthly payments.
This can be a great way to become debt-free faster and own your home entirely.
However, you should make sure that the extra monthly payments are worth it. For instance, you could instead put them towards a retirement fund, college savings, or other things. But if a shorter loan term sounds good, then go for it.
Lower Your Mortgage Interest Rate
Another great reason to refinance your mortgage is to get a better interest rate with your lender.
If you didn’t have much luck getting a good interest rate when you were buying a house because of a low credit score or just a bad economy, then refinancing can help you secure a better interest rate.
However, you should have at least 20% equity in your home to get a good rate or your credit score should have greatly improved.
You can also look into moving to a fixed-rate mortgage if you’re currently on a variable rate, or the other way around. You can shop around to see if you can secure a better rate.
Make Lower Monthly Payments
When you get a mortgage, your lender might ask you to get mortgage insurance. This is usually the case when you don’t have a big down payment or a low credit score.
Once you build up enough equity in your house, you can refinance your mortgage with a lender that doesn’t require mortgage insurance. This can lower your monthly payments, as well as the total amount you pay for the house.