If you’re evaluating your long-term financial health, it might be worth considering the reasons to refinance your home.
Homeowners, having a lower interest rate and a more affordable monthly payment sounds too good to be true, right? It’s possible by refinancing your mortgage. It’s done by taking out a new mortgage loan and paying off the old one, meaning you’ve replaced the old one with a new one with better terms. The idea is that you’re setting yourself up for a bright financial future, as you’ll, in theory, be able to save more money. Before you decide one way or another, consider these reasons to refinance your home.
Reason #1: Reduces Your Interest Rate
You might be surprised how much money you can save over the lifetime of your mortgage loan just by reducing the interest rate. However, it strongly depends on your original loan and when you opened it. That’s why it’s necessary to analyze your contract.
“A higher loan amount could benefit from a relatively small reduction in interest rate, while a smaller loan amount may need a larger interest rate to justify refinancing,” says Jason Lerner, MBA, area manager at First Home Mortgage. “If rates improve early in the original loan’s life, the homeowner will potentially save more money in interest over the life of the loan. If later in the life of the original loan, the homeowner will save less in interest payments but may be able to significantly lower their payment.”
Reason #2: Reduces the Term of the Loan
A significant portion of a mortgage loan goes to interest, so cutting the amount of time that you’re paying it back could save you money in the long run. Lerner gives the example that if you were to refinance a $400,000 loan from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage, you’d save $310,000 in interest payments over the lifetime of the loan (based on current market interest rates). However, that’s not always best for everyone.
“When you first start paying your mortgage, most of your payment goes toward the interest. Later on, more goes toward the principal. When you refinance, you start that whole process over again. You'll be paying mostly interest again. Plus, you might be adding 20 more years of payments, which means you could end up paying way more interest even if the rate is lower,” says Joe DiSanto, founder and CEO at Play Louder.
Reason #3: Accesses Your Home Equity
Maybe you’re looking to buy an investment property or maybe you want to do some construction on your existing one. Whatever the reason, refinancing can allow you to access your home equity. A cash-out refinance allows you to refinance your mortgage for a higher amount than you owe, letting you access your home equity. That amount is determined by your mortgage balance and your home’s current value.
Reason #4: Consolidates Debt
A cash-out refinance can come in handy if you have debt piling up. You can use your home’s equity money to pay off debts. “Though this may increase the homeowner’s mortgage payment, it would eliminate other monthly payments, reducing overall household expenses and improving household cash flow. This can also have a positive impact on the homeowner’s credit score,” says Lerner.
Reason #5: Ability to Remove Someone From the Mortgage
Certain mortgages require a refinance to remove someone from a mortgage. Maybe it’s due to a divorce, or maybe a co-signer wants to jump off to be eligible for a new mortgage. Whatever the reason, refinancing may be the only way to remove them.
The Bottom Line
There are plenty of reasons to refinance your mortgage (and plenty of reasons not to refinance your mortgage). So, as with all financial decisions, it will come down to your specific situation. It sounds nice to have a lower interest rate and monthly payment, but that doesn’t come free, and there are downsides to consider, too. Dive into your current mortgage contract and see if the grass is greener on the other side.
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Caitlyn Fitzpatrick, the author of this article, has been an editor and writer since 2014. Benzinga is just one of the many publications her work can be found in. Others include U.S. News & World Report, Reader’s Digest, Today’s Parent, Us Weekly and more. We interviewed Jason Lerner, MBA, area manager at First Home Mortgage, and Joe DiSanto, founder and CEO at Play Louder, an educational platform for financial strategy coaching. They discussed the top reasons to refinance your home and other information to consider.
FAQ
Are there any benefits to refinancing your home?
According to Lerner, there are four major benefits to refinancing: reducing the amount of interest paid over the life of the loan, reducing your monthly mortgage payment, paying off your mortgage faster and paying off high-interest debt or debt with high payments.
What do I get if I refinance my house?
You get a new mortgage that replaces your existing one. That new mortgage will have better terms, such as a lower interest rate and monthly payment.
At what point is it worth it to refinance?
It all comes down to one thing: Which loan is going to most benefit you financially? “It’s worth it when you’ve done the math and you know you’re coming out ahead financially in the long run,” says DiSanto. “Don’t just look at the lower payment. Figure out how much total interest you’ll pay on your current loan versus the new loan. You have to compare the amortization of both loans to see if you’re really doing better.”
Sources
- Jason Lerner, MBA, area manager at First Home Mortgage
- Joe DiSanto, founder and CEO at Play Louder, an educational platform for financial strategy coaching
About Caitlyn Fitzpatrick
Caitlyn Fitzpatrick has been a professional writer and editor since 2014 and entered the commerce journalism world in 2017. She’s passionate about helping readers make smart buying decisions by using data insights and interviewing experts. Most recently, Fitzpatrick was the Senior Shopping Editor at Trusted Media Brands, where she led affiliate content on Reader’s Digest. In addition to Benzinga, Fitzpatrick’s work can be found in a range of publications, including U.S. News & World Report’s 360 Reviews, Today’s Parent, Betches, WhatToWatch.com, PS (formerly Popsugar), and more.