Five smart reasons to refinance your mortgage
Thinking about refinancing your mortgage? Go about it for the right reasons, and you could see some significant savings.
In fact, if you refinance, "You may be able to pay less interest, lower your monthly payment, or convert from a 30-year loan to a 15-year loan and build your equity faster!" notes the U.S. Department of Housing and Urban Development.
Sounds like some pretty smart incentives to refinance, right? But, before you take this big step, it's important to remember that refinancing also comes at a price.
"There's definitely a cost to refinancing, and it takes a lot of effort, too," says Joffrey Long, education chair at the California Mortgage Association. "You want to weigh the costs against the benefits before deciding to refinance."
[Think refinancing is right for you? Click to compare rates from multiple lenders now.]
To help you make an informed decision, we've covered five smart reasons to consider refinancing your home.
Reason #1 - You Could Score a Lower Interest Rate
Want a good reason to refinance? Consider this: Lower interest rates = savings...in some cases, a good chunk of savings.
"Refinancing for a lower interest rate is one of the most common reasons to lower your interest rate," says Long.
And this comes as no surprise when you take into account these figures from "A Consumer's Guide to Mortgage Refinancing" by the Federal Reserve Board, the governors of the United States central bank.
The Federal Reserve's guide compares the monthly payments on a 30-year fixed rate loan of $200,000 at 5.5 percent and 6 percent:
Monthly payment at 6 percent: $1,199
Monthly payment at 5.5 percent: $1,136
Over 10 years, at 5.5 percent, you will have saved: $7,560
[Want to lower your interest rate? Click to compare rates from multiple lenders now.]
However, not everyone is taking advantage of the lower interest rates and the potential savings that come with them.
"Some 58 percent of homeowners who have mortgages - that's about 28 million households - pay interest rates that are higher than today's bargain rates," according to the January 2012 Consumer Reports article "Refinance your mortgage (again)?" "Many could save thousands by refinancing."
Reason #2 - You Want to Get out of an Adjustable Rate Mortgage (ARM)
If you're not fond of surprises and unpredictability, you're probably not the biggest fan of an adjustable mortgage rate, which changes periodically based on a rate that's tied to a certain index.
This means that your mortgage rate could go down - or up - throughout the life of your loan. And we're guessing that you're not the happiest camper when your rate takes a sharp hike.
If that's the case, you might be better suited for a fixed mortgage rate.
[Want to switch to a fixed mortgage rate? Click to compare rates from multiple lenders now.]
And how can you make this swap to stability? By refinancing your mortgage. And Long says now is a great time to do it.
"Refinancing to get out of an adjustable rate mortgage and switching to a fixed rate mortgage is a great reason because the rates have not been this low in 40 years," Long says. "You want to lock in this rate."
Reason #3 - Your Credit Score is Stellar
Let's get real: Having a bad credit score - for lack of a better word - sucks. Having a stellar credit score, on the other hand, could really work in your favor when refinancing.
Specifically, your mortgage rate could be lowered when you refinance if your credit has improved from when you originally took out your loan, notes the Federal Reserve Board.
Why does your credit score play such a big role when it comes to your mortgage rate? Because when you apply for a mortgage, "the lender will want to know your past history of borrowing in order to understand the risk they might be taking by lending you money," says New York State's Department of Financial Services. It adds that "a healthy credit report and a high credit score can mean better financial options for you."
So if you've been improving your credit score in an effort to make yourself less of a risk to lenders, it might be a smart idea to consider refinancing your mortgage.
[Has your credit score improved? Click to see if you can save by refinancing your mortgage.]
"If your credit is significantly higher, and you were initially given a higher rate due to your poor credit score, then refinancing could be a good option," says Long. "But, you should definitely call your lender and find out what your specific options are for your certain circumstance."
Reason #4 - You're Rollin' in Dough
If you recently hit the jackpot, got a generous salary increase, or came across more money than you know what to do with, refinancing could be a great option for you.
Why? Because if you're able to afford higher monthly payments, "this may allow you to shorten the term of your mortgage," according to the Government National Mortgage Association, also known as Ginnie Mae.
The upshot? By refinancing and shortening your term, you could save money in the long run by paying less interest over the course of those extra years. What's more, Long says that a 15-year loan generally yields an interest rate that's .5 percent lower than a 30-year loan.
"A lot of people don't realize how low the rate is on a 15-year loan - right now it's below 3 percent," says Long. But, he warns that switching to a 15-year loan and making higher monthly payments is only good if you can ascertain your financial footing in the next 10 or 15 years.
[Ready to switch to a 15-year loan? Click to compare rates from multiple lenders now.]
For example, Long says that if consumers think their employment or salary may drop, or they need to send a son or daughter to college in 10 years, they need to determine whether or not they'll have the cash flow to cover their monthly payments - on top of these other expenses.
Reason #5 - You Want to Combine Multiple Loan Payments
If you happen to have two or more loans out for your home, refinancing to consolidate your loans might be a smart idea.
Long agrees, noting that on top of the convenience of paying just one bill, consolidating your loans could also yield an overall lower interest rate.
He warns, though, that consolidating your loans does not automatically equal a lower interest rate. So you'll want to contact your lender and carefully see if there's savings potential.
"If you don't see a benefit to combining your loans, it's not that big of big deal to write two checks instead of one," says Long. "You want to make sure you see a benefit before deciding to refinance and combine your loans."
