Refinancing your mortgage can be a great way to lower your monthly payments, reduce your interest rate, or access your home’s equity. But is it always worth it? In this article, we’ll discuss the factors to consider when deciding whether to refinance your mortgage.
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What is refinancing?
Refinancing is the process of replacing your current mortgage with a new one. This can be done for a variety of reasons, including:
- Lowering your interest rate
- Reducing your monthly payments
- Shortening the loan term
- Switching from an adjustable-rate to a fixed-rate mortgage
- Accessing your home’s equity
When is it worth it to refinance?
1. Lowering your interest rate
One of the most common reasons to refinance is to lower your interest rate. If interest rates have gone down since you took out your mortgage, refinancing can lower your monthly payments and save you money over the life of the loan. As a general rule, it’s worth considering refinancing if you can lower your interest rate by at least 1%.
For example, let’s say you have a 30-year fixed-rate mortgage with a balance of $300,000 and an interest rate of 4.5%. By refinancing to a new loan with a 3.5% interest rate, you could save over $100 per month on your mortgage payment and over $37,000 in interest over the life of the loan.
2. Reducing your monthly payments
Another reason to consider refinancing is to lower your monthly payments. This can be especially helpful if you’re struggling to make ends meet or want to free up some cash for other expenses. You can do this by refinancing to a longer loan term or a lower interest rate.
For example, let’s say you have a 15-year fixed-rate mortgage with a balance of $200,000 and an interest rate of 4%. By refinancing to a 30-year fixed-rate mortgage with a 3.5% interest rate, you could lower your monthly payments by over $400 per month. However, keep in mind that extending the loan term will increase the total amount of interest you’ll pay over the life of the loan.
3. Shortening the loan term
If you’re looking to pay off your mortgage sooner, refinancing to a shorter loan term can help you do that. This will increase your monthly payments but can save you money in interest over the life of the loan.
For example, let’s say you have a 30-year fixed-rate mortgage with a balance of $250,000 and an interest rate of 4%. By refinancing to a 15-year fixed-rate mortgage with a 3% interest rate, you could increase your monthly payments by about $700 per month but save over $150,000 in interest over the life of the loan.
4. Switching from an adjustable-rate to a fixed-rate mortgage
If you have an adjustable-rate mortgage (ARM), refinancing to a fixed-rate mortgage can provide more stability and predictability in your monthly payments. With an ARM, your interest rate can fluctuate over time, which can make it difficult to budget and plan for the future.
For example, let’s say you have a 5/1 ARM with a balance of $300,000 and an initial interest rate of 3.5%. After five years, the interest rate could adjust upward, resulting in higher monthly payments. By refinancing to a 30-year fixed-rate mortgage with a 4% interest rate, you can lock in a stable interest rate and avoid the uncertainty of an adjustable rate.
