When Is Refinancing A Mortgage Worth It?

Have you ever thought of refinancing your mortgage? You’ve probably heard about refinancing but are unsure when it’s best to refinance or what’s involved. So, if you want to know whether refinancing is right for you, keep reading!

Mortgage refinancing is replacing your existing loan with a new one. It is when you secure a new loan to repay your old one. You may refinance your mortgage with the same lender or with another lender. In this process, you pay the current loan amount and are responsible for paying off your new mortgage. There are multiple reasons for refinancing, and knowing when it’s best to refinance is important.

The ultimate goal of refinancing is to save money in the long run. So, before you think about refinancing, you should clearly understand your financial situation and objectives. With that in mind, here are some major reasons to refinance your mortgage.

1. Lower Monthly Payment

The primary reason for refinancing a mortgage is to lower the interest rate. When mortgage rates fall, then refinancing can lower your monthly mortgage payment. So, if your current rate is higher than today’s market rates, you should consider refinancing. But how much lower rates justify the refinancing? You can calculate that even a reduction of one-half of a percent in rates can make a difference in the payments. However, it’s important to consider the fees associated with refinancing. So, ideally, you should consider refinancing if the present interest rate is lower than your mortgage by two percentage points.

2. To Convert an ARM to A Fixed Rate Mortgage

You may also consider refinancing to convert an Adjustable Rate Mortgage (ARM) to a fixed-rate mortgage. It is a common practice because the ARM initially offers a lower rate and then readjusts the rates periodically. Initially, ARMs provide lower monthly payments but can significantly increase costs if rates rise. And when this happens, a fixed-rate mortgage becomes a better choice.

3. Change the Term of Your Loan

Over time, your financial situations change. You may want to increase or decrease your loan term depending on your current financial condition. If you can’t reduce your interest rate, you can still lower your payments by refinancing. This is possible when you refinance your mortgage to a longer term than what’s left on the mortgage. This is not the best choice because the increasing word means paying more interest. However, it helps in lowering your monthly payment during a financial crisis. Another possibility is when you want to refinance to a shorter term. You can also think of refinancing if your credit score has improved, and now you can qualify for a lower rate.