What are the benefits of refinancing your home loan?

Mortgages are not meant to last forever. While you can stick with your original loan to the end, it’s common for homeowners to at some point refinance their mortgage. Refinancing allows you to adjust your loan terms, and it can be helpful to adjust your mortgage as your financial goals change. Refinancing allows you to change your loan type, your mortgage rate, your loan term, or to borrow your equity.

Here are 5 benefits to refinancing your mortgage.

1. You could pay off your loan faster

You can refinance your mortgage into a shorter term. If you have a 30-year loan and, after 10 years, decide you would like to pay it off more quickly, you can refinance to a 15-year loan and own your home free and clear 5 years sooner. The sooner you don’t have to worry about a monthly mortgage payment, the sooner you can start using that money for other financial goals.

2. You could save money on your loan

When you refinance to reduce your loan term, you pay off your loan more quickly and pay less interest. You also can save money on interest if your refinance rate is lower than your current interest rate.

Here’s how that would work: Say you buy a home for $400,000 with 10% down and a 30-year fixed-rate mortgage at 7% interest. After 6 years, you’ve paid down your mortgage balance from $360,000 to $333,690 and paid $146,135 in interest. If you stay with this loan for the full term, you’ll pay $502,232 in interest.

If you refinance your balance of $333,690 after 6 years to a new 30-year, fixed-rate loan with a 5% rate, you’ll pay $311,185 in interest on that loan. Combined with the interest paid on the first loan, that’s $457,320 in interest, saving you $44,912 in interest.

3. You could pay less each month

If you refinance to the same term as your original mortgage, you’re extending the time you have to pay off the loan and reducing your monthly payment. And if you refinance to a lower interest rate, you could save even more on your monthly payment.

Here’s an example of how your payment would go down: On a 30-year mortgage for $360,000 with a 7% interest rate, your monthly payment is $2,395. After 6 years, you refinance your loan balance of $333,690 to another 30-year mortgage at the same interest rate. Your new loan has a lower starting balance and restarts the 30-year term, reducing your monthly payment to $2,220 and saving you $175 a month. The drawback is it will take you longer to own your home free and clear.

Let’s say rates were low when you refinanced, so you also lowered your interest rate. Your new 30-year mortgage is $333,690 with a 5% interest rate. Now, your monthly payment is $1,612, saving you $783 a month.

4. Payments can become more predictable

If you have an adjustable-rate loan, you can refinance to a fixed-rate mortgage and protect yourself against any interest rate increases. This makes monthly payments more predictable because your principal and interest payments will never change.

5. You can borrow equity to pay for major expenses

A cash-out refinance allows you to take out a new loan based on your home’s current value, pay off your original loan, and keep the difference. You’ll repay the cash as part of your new mortgage and can use it to consolidate debts, pay for home renovations, or send children to college.

Here’s how a cash-out refinance works. Say you bought your home 10 years ago for $290,000 with a 10% down payment and a 30-year fixed-rate mortgage at 4%. Your home is now worth $420,000, and you’ve paid down your mortgage balance to about $205,000. You’d have about $215,000 in equity in your home.

If you keep 20% equity in your home, you could refinance to a new 30-year fixed-rate loan at 7% for $336,000, pay off your original loan and keep the difference in cash: $131,000. The trade-off is your monthly payment would go from $1,612 to $2,235, and you’d add 10 years to your loan term.

When is refinancing not a good idea?

There are good reasons not to refinance, depending on your situation. Here are a few of them:

• When you might not break even. While you may save money with a refinance, it’s important to remember that there are costs involved in refinancing. If refinancing saves you money on your monthly payment, calculate how long it will take those savings to recoup your closing costs. If you plan to sell before you reach that break-even point, refinancing will cost you more than you’ll save.
• If the savings aren’t worth the effort. Sometimes, the savings from a refinance might not be enough to justify the time, effort, and expense of refinancing your loan. Even when the process is streamlined and smooth, it’ll still require some work.
• Your monthly payment may increase. Refinancing to a shorter term may increase your monthly payment as you’re paying off your loan more quickly. Even if you refinance into a lower interest rate to save money over time, your monthly payment could still increase.
• When it reduces your home equity. A cash-out refinance lets you borrow your equity, which means you’ll have less of it to borrow in the future if you need it.

Alternatives to refinancing your mortgage

If refinancing doesn’t make sense, consider other ways to save money on your mortgage.

• Make extra principal-only payments. These payments go toward the principal and reduce the amount of interest you’ll pay over your loan term. They also allow you to pay off your loan ahead of schedule.
• Use a personal loan. A personal loan can be secured or unsecured. A secured loan offers lower interest rates, while an unsecured loan has a higher interest rate but requires no collateral.
• Get a home equity loan or home equity line of credit. A home equity loan and HELOC are second mortgages that use your house as collateral. With HELOC, you can borrow money up to the credit line pegged to your equity and repay it with interest, while a home equity loan provides a lump sum. If you have enough equity, these options can help you borrow at a lower rate.
• Apply for a zero-interest credit card. Some credit card providers offer zero interest for a specific period if you transfer your balances. Just beware that once the introductory period expires, you’ll be charged the standard rate.

The bottom line: The pros of refinancing might outweigh the cons

As you try to figure out if you should refinance your mortgage, think about why you are refinancing. This will help you understand whether refinancing will benefit you, given current interest rates, the length of your new loan term, and how long you plan to o your home.

In addition to your own research, it’s important to speak to a Home Loan Expert who can help you determine the best refinance options for you. They may even be able to help you explore other loan options if there’s a better fit with a different product.

Already decided that a mortgage refinance is right for you? Apply for initial approval with Rocket Mortgage^® and start the refinancing process today.