As a homeowner, you might receive regular invitations to refinance your mortgage in the mail. You may be wondering if you should refinance, or what’s in it for you if you do. While refinancing a home loan doesn’t make sense for everyone, there are a few good reasons why it might be something you’d want to look at more closely.
Getting a better interest rate
One of the main reasons people consider refinancing is to get a better interest rate. While interest rates today aren’t quite as low as they once were, they are still hovering near historic lows. Deciding to refinance your mortgage now could mean that you get a rate significantly lower than what you’re currently paying.
You might also consider refinancing if you aren’t happy with the type of interest you’re paying. Mortgages typically offer either a fixed interest rate or an adjustable rate. A fixed interest rate can be ideal if rates are low when you get the loan, while an adjustable rate can be preferable if rates are high and you expect them to drop in a few years. Depending on your circumstances, the current interest rates and how long you plan on staying in your home, refinancing from a fixed to an adjustable-rate mortgage — or the other way around — can make sense.
Changing the monthly payment
Ideally, the amount you pay toward your home each month should be less than 28 percent of your gross income. That might have been the case when you applied for and received your mortgage, but your circumstances may have changed. If you are earning more, you might want to pay more toward your home loan every month, so that you can pay it off faster and pay less interest over time. But if you’re making less than you used to, you might be struggling to make ends meet and appreciate the opportunity to pay less every month. Refinancing so that you get a better interest rate can mean smaller monthly payments.
Lengthening or shortening the mortgage
A final reason to refinance your mortgage is to change the length of the loan. While a 30-year loan with a small monthly payment might have seemed appealing at first, maybe now you want to get out of debt sooner, or maybe you can afford to make slightly larger payments every month. When you refinance, you can choose a new term length, such as 15, 25 or 30 years. Choosing a short term will mean you pay more every month but less over time. The longer the mortgage term, the less you pay every month, but the more you’ll pay over time.
Refinancing your mortgage can be a great way to save money and reach other financial goals. No matter the reason for a refinancing, make sure that doing it will actually help you in the end.
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