With rising mortgage rates, it’s obvious to look for an efficient home loan option than the one you have on hand. As such, refinancing a mortgage has become tempting for people but it’s important to understand when it’s the right time to do so. The primary reason to refinance a mortgage is to avail lower interest rates.
When you refinance your home loan, you replace your existing mortgage with a new one. The new mortgage you take pays off your old one and then you need to pay the interest of your new mortgage. There are multiple reasons for refinancing a mortgage by transferring your outstanding loan balances to a new lender. However, before you do that, make sure to have a clear understanding of your financial situation and objectives.
If you have come across a better mortgage option, you should understand if refinancing is the right choice. So, if you’re unsure about refinancing your mortgage, here are some good reasons to consider a mortgage refinance.
1. Get a Lower Rate of Interest
The primary reason to refinance a home loan is to save money on interest cost. If the rate of interest has gone down and you don’t want to pay higher interest on an existing home loan than refinancing is a wise decision. When you switch to another lender or loan policy with lower rates, it helps in bringing down the total interest cost and consequently your monthly EMI payments. When you refinance your mortgage for one with a lower interest rate, it is known as rate-and-term financing. Even if you find a deal with one percent lower rate, it can make a difference in the total loan payment amount. However, while refinancing to get a lower interest rate, make sure to consider the fees associated with refinancing.
2. Switch from Fixed Rate to Floating or Adjustable Rate of Interest
It makes sense to refinance if you want to convert an Adjustable Rate Mortgage (ARM) to a fixed-rate mortgage. When you have taken a fixed-rate loan but later the interest rate starts declining, you may choose to refinance to a floating rate loan to save on interest cost. The fixed-rate loans usually carry a higher rate of interest than floating-rate loans. If this is the case with you, you should look for a better alternative. If you can’t find floating or ARM options with your existing lender, you may choose to refinance the loan by switching over to another lender.
3. Change the Home Loan Tenure
If you’re looking to change the tenure of your loan, refinancing is the solution for you. When your financial situations change, you may want to lower your monthly commitments by lowering your monthly interest payment. On the other hand, if your financial position has changed for the better, it’s possible to reduce the tenure of the loan to pay off the amount earlier. Refinancing your mortgage to a term that suits your current financial condition can increase or reduce your monthly payments. By extending your payoff date past what it currently is, you can lower your monthly interest cost.