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4 Reasons to Consider Refinancing Your Mortgage

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Depending on your monetary goals and the age of your current mortgage, there are reasons why refinancing might be the right thing for you to do. With refinancing, you actually are getting a whole new mortgage and the things that counted the first time, like your credit rating and the current mortgage interest rates will matter.

1. You Could Shorten Your Loan

Maybe you purchased your home about five years ago and you've been noticing that mortgage interest rates are going down. If you currently have a 30 year mortgage, with 25 years of payments left, it may be tempting to refinance to shorten your loan. The first step would be to consult with your mortgage provider to discuss current mortgage refinance rates.


Shortening your loan may  be an attractive idea, but you need to thoroughly discuss it with financial professionals and talk about all of the aspects. If interest rates have really gone down significantly, it could be a good choice. However, make sure you get an estimate of what your new monthly payment would be. It stands to reason that if you're cutting the years of your mortgage in half, you could be paying twice what you pay now every month.


Will the lower interest rate be low enough so that your new mortgage payment will not be a hardship for you? If the answer is "no", don't worry. There are other refinancing options.

2. You Could Get a Lower Interest Rate

If you have been working hard on increasing your credit rating, it may pay off when combined with a lower interest rate. As you know, the less a financial institution sees you as "risky", the lower interest rate you'll get.


When interest rates drop at the same time as your credit rating improves, this could mean that you stand to save a lot of money each month by refinancing. If you choose this option, you'll be paying your mortgage for just as many years, but the amount will be less each month.


You could invest what you save, or use the extra to pay off another bill.

3. You Could Switch to a Fixed Rate

Adjustable rate mortgages (ARM) can be nerve-racking. If you obtain the mortgage when interest rates are low, you will only enjoy that until rates go up. A nervous type will probably not be happy with an adjustable rate because of the uncertainty. Technically, each month you could owe a different payment amount and that doesn't go over too well with people who keep a strict budget.


Typically, it's easier to get an adjustable rate mortgage, especially when purchasing a more expensive house, which is why so many people have them.


If you'd rather have a fixed rate mortgage (FRM), keep your eye on interest rates. When they seem low, have a meeting with your bank to see what your new rate would be if you switched to a fixed rate mortgage. With a fixed rate, you can enjoy the same mortgage payment each month and can relax knowing it will never change.

4. You Could Get Some Cash

Think about this one very carefully before you decide to do it. The idea of getting a large sum of cash, especially if you have other loans to pay off, is tempting. However, don't plan on using this money for anything frivolous. It should only be used for home improvements; things that will make your home worth more.


This is how it could work and it has to do with your home's equity. If you have been paying your mortgage for a while, you may have reached the point where your home is worth more than the balance of your mortgage. If you are at this point, you could apply for something called a cash-out refinance.


It's a bit complicated but in general it works like this. If your home is worth $400,000 and the balance of what you owe on your current mortgage is $300,000, that means you could refinance your home for $400,000 and get some money back at closing.


You won't get a check for the whole difference ($100,000) since there is a mathematical calculation used that determines how much you will receive at closing, but it could still be a sizable amount. If you really need the money now, go ahead and discuss it with your lender. Don't forget, though, you will have to pay closing costs and other fees out of your potential balance, so you may not end up getting as much as you think.


There are several smart things you can do as a homeowner. It's good to do some research on your own, but you can only make the choice that's best for you after consulting with your bank's mortgage experts.

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