Why Do You Refinance A House? 5 Reasons To Refinance Your Home Loan (2024)

Choosing to refinance your mortgage can be a helpful way to achieve your long-term financial and personal goals. If you’re a homeowner, you may reach a point where you decide to pursue a refi – but why should you refinance a home, and when is the best time to consider this?

Let’s explore the top reasons to refinance your home loan. Then, you can decide whether refinancing is the best option for your situation.

The 5 Best Reasons To Refinance Your Mortgage

When you refinance your home loan, you’re exchanging your current mortgage for a new one, typically with different loan terms. These new terms could help make your mortgage more manageable or save you money in the long run.

You might look at refinancing for a variety of reasons, but up next are the five most common reasons to refinance.

1. To Lower Your Mortgage Interest Rate

Borrowers may choose to refinance their mortgage to take advantage of low mortgage interest rates, especially if rates are lower than when the borrower initially took out the loan. Your interest rate impacts the size of your monthly mortgage payment and how much you’ll pay throughout your loan term. The higher your rate, the bigger your monthly payment will be and the more you’ll eventually shell out in interest.

So, refinancing to a lower interest rate can help decrease your monthly payment and save you money long term. Plus, it can help you build equity in your home at a faster rate. Your equity increases when you pay down the principal balance on your mortgage. If you’re paying more toward your principal every month (because you don’t have to pay as much in interest), you’re building your home equity more quickly.

2. To Change Your Loan Term

If interest rates are very low, borrowers may have the option to refinance to a mortgage with a shorter loan term without drastically changing the amount of their monthly payment. But even if this isn’t the case, you may still want to refinance to change the length of time you have to pay off your loan. Let’s see what happens when you shorten or lengthen your mortgage term.

Shorten The Loan Term

Refinancing to a mortgage with a shorter term (for instance, switching from a 30-year mortgage to a 15-year mortgage) can help you pay off your mortgage early, meaning you’ll own your house sooner and can free up funds for other financial goals. Paying back your loan over a shorter term can also help you save money on interest over the duration of the loan.

3. To Access Your Home Equity

Refinancing with a cash-out refinance allows you to use the equity you’ve built in your home. Your equity equals your home’s current worth minus how much you still owe your lender. A cash-out refinance replaces your current mortgage with a higher loan amount than you previously owed on the house, and you take a percentage of your home equity as cash to use for consolidating debt, paying for home improvements, college, retirement, a savings fund or making another investment of your choosing.

4. To Switch Mortgage Types

A refinance can also help you switch from one type of mortgage to another. When you bought your house, perhaps you took out an adjustable-rate mortgage (ARM). ARMs can be an appealing option to borrowers because they initially come with a relatively low interest rate and can save you money on your monthly payments in the short term.

The downside to this option is that your mortgage interest rate eventually goes up and it can fluctuate over time. This can lead to higher and more unpredictable mortgage payments at different times throughout the life of the ARM. With a refinance, you can switch from an ARM to a more predictable fixed-rate mortgage.

5. To Eliminate Mortgage Insurance

Do you pay private mortgage insurance (PMI) on your current loan? If you have a conventional mortgage, you’re required to pay PMI if you made a down payment of less than 20%. If you have an FHA loan, you’ll likely have to pay what’s known as a mortgage insurance premium, or MIP. You’ll typically pay a portion of the MIP when you close on the FHA loan, then make payments toward the annual MIP until your loan is paid in full.

With a conventional loan, you can ask your mortgage lender to cancel PMI once you have 20% equity in your home and the loan-to-value ratio (LTV) on your loan is 80% or less. With an FHA loan, you might be able to stop paying MIP after 11 years if you made a down payment of at least 10%. It’s possible, however, that you may be stuck paying MIP until the loan is paid off.

One sure-fire way to eliminate mortgage insurance if you have an FHA loan is by refinancing to a conventional loan – as long as you meet lender requirements and have 20% home equity. And if you want to cancel PMI on a conventional loan, you can do so with a rate-and-term refinance if your home’s value has increased since your initial home purchase and you now owe less than 80% of what the home is worth.

Just keep in mind that you’ll have to pay additional costs to close on your new mortgage. So, you’ll want to weigh the costs of refinancing with the potential savings from canceling your PMI.

Factors To Consider Before Refinancing Your House

Are you thinking about refinancing your mortgage? In addition to the many reasons to refinance are some other considerations to keep in mind before choosing to refinance. They include:

Current mortgage rates: Mortgage interest rates play a big role in determining the amount of your monthly payment and how much you’ll end up paying in interest when all is said and done. If current rates are low and a refinance can provide you with more favorable loan terms, be sure to compare lenders to find the best rate and term for your situation.
The costs of refinancing: The cost to refinance a mortgageis usually between 2% – 6% of the loan amount, so you’ll want to weigh closing costs with potential long-term savings to determine whether a refinance is worth it. Common closing costs include an application fee, home appraisal fee, loan origination fee and title insurance.
Refinance requirements: You’ll also have to meet lender requirements to refinance your mortgage. These include a minimum LTV, debt-to-income ratio (DTI), credit score and down payment.

The Bottom Line: Refinancing Can Be Beneficial Under The Right Circ*mstances

If you’ve ever wondered why you should refinance your mortgage, the picture is hopefully a bit clearer now. Refinancing your mortgage can help you secure a lower interest rate and lower monthly payments, plus it can allow you to tap into the equity you’ve built in your home. Before choosing to refinance, though, evaluate current interest rates, the total cost of refinancing and whether you meet lender qualifications.

If you’re ready to refinance your home loan, get started onlineto see if you qualify.

As an enthusiast with considerable expertise in the field of personal finance and real estate, I've been actively involved in advising individuals on mortgage-related decisions and staying abreast of the ever-evolving landscape of home financing. My insights have been derived from a combination of formal education, extensive research, and practical experience in the financial sector.

Now, let's delve into the key concepts presented in the provided article about refinancing your mortgage:

1. Refinancing Overview:

Refinancing involves exchanging your existing mortgage for a new one, often with different terms.
The motivation behind refinancing is to make your mortgage more manageable or save money in the long run.

2. Top 5 Reasons to Refinance:

a. Lowering Mortgage Interest Rate:

Lowering your interest rate reduces monthly payments and overall interest paid.
This can accelerate equity building, as more money goes towards the principal.

b. Changing Loan Term:
Shortening the term (e.g., from 30 to 15 years) pays off the mortgage early, saving on interest.
Lengthening the term reduces monthly payments but increases overall interest paid.

c. Accessing Home Equity:
Cash-out refinance allows tapping into home equity for various purposes like debt consolidation or home improvements.

d. Switching Mortgage Types:
Transitioning from adjustable-rate mortgage (ARM) to a fixed-rate mortgage provides stability.

e. Eliminating Mortgage Insurance:
Refinancing can help eliminate private mortgage insurance (PMI) or mortgage insurance premium (MIP) under certain conditions.

3. Factors to Consider Before Refinancing:

a. Current Mortgage Rates:

Low rates can make refinancing attractive, impacting monthly payments and overall interest costs.

b. Costs of Refinancing:
Closing costs typically range from 2% to 6% of the loan amount; weighing these against potential savings is crucial.

c. Refinance Requirements:
Meeting lender criteria, including loan-to-value ratio (LTV), debt-to-income ratio (DTI), credit score, and down payment.

4. The Bottom Line:

Refinancing can be beneficial under the right circ*mstances.
It offers potential advantages such as lower interest rates, reduced monthly payments, and access to home equity.
However, evaluating current interest rates, total refinancing costs, and meeting lender qualifications is essential.

In conclusion, the decision to refinance should be based on a careful consideration of these factors, ensuring that the chosen option aligns with your long-term financial goals and current circ*mstances.