With today’s historic low rates, many people are thinking about refinancing their mortgages and lowering their monthly interest expenses.
But is it the right time for you?
Whether you need to lower your payments or pay for home improvements, here are three good reasons to refinance your home.
To get a lower interest rate
The best reason to refinance a mortgage is to secure a lower interest rate on your loan. Your latest statement from your lender should tell you the rate you’re paying now.
If your interest rate is 0.75% or higher than today’s lowest rates, you may want to refinance.
Even an interest rate difference of one-half of 1% can make a significant difference in your total interest expense, assuming you intend to stay in your home for more than a few years.
Shorten your loan term
Another good reason to refinance your home is to get a shorter-term on your loan.
You may have an original loan term of 15, 20, or 30 years, for example. The most common length of time for a mortgage loan is 30 years.
When interest rates drop, refinancing your mortgage can net you a much shorter term with only a slight increase in your monthly payments.
A major drop in your interest rate could even cut your payment term — how many years you have to pay — in half!
To pay off expenses
The difference between the value of your home and your mortgage balance is called your home equity.
By taking out a larger new mortgage than your current mortgage, you can take equity from your home and put money in your pocket for other purposes.
Some homeowners choose to tap into their home equity to cover other expenses, such as home improvement and debt.
Just remember, while it is nice to borrow from a lower interest rate than, say, a credit card, it is not smart to transfer unsecured debt to a secured debt unless you have a plan on pay it off soon.