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The 10 Best Reasons to Refinance Your Mortgage

Doug Whiteman
The 10 Best Reasons to Refinance Your Mortgage

Just like your car, sometimes your mortgage is due for a trade-in. You might find a new model with improved options that will save you money or fit better with changes in your lifestyle.

Now might be the perfect time to refinance your mortgage, because interest rates remain near historic lows. They're down considerably from a year ago.

But, as with buying your next car, refinancing your mortgage is a very big deal. There are costs involved, and you can wind up with buyer's remorse.

Here are 10 times when refinancing your home loan can be a good move.

1. If interest rates are falling

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Interest rates fluctuate due to changing economic conditions, Federal Reserve decisions on monetary policy, and other factors.

Mortgage rates have fallen in 2019 to their lowest levels in years, meaning a refinance can make sense even if you took out your current mortgage just one year ago. By swapping out your loan, you might see substantial savings on interest costs.

Homeowners who refinanced during the spring of 2019 are saving an average $1,700 a year, or about $140 a month, according to calculations from mortgage company Freddie Mac.

2. If you can shorten the loan term

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If you'd like to get out from under your mortgage sooner, you could refinance to a loan with a shorter term. Maybe go from a 30-year mortgage to a 15- or 20-year option.

Shorter-term mortgages tend to come with lower interest rates, and the savings don't end there. You'll accrue less interest over the tighter time frame.

But you'll also face a higher monthly mortgage payment, maybe higher than you can afford. Calculate what your mortgage payment would be.

3. If you can lock in a fixed rate

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With a fixed-rate mortgage, your interest rate never changes and your monthly payment stays level throughout the life of the loan.

That's different from an adjustable-rate mortgage, or ARM, which has an interest rate that can go up or down every year — pulling your payment amount up or down, too.

During a time of rising interest rates, an ARM can become a costly nuisance, making a refinance into a fixed-rate mortgage very appealing. Take a look at today's best mortgage rates where you are.

4. If switching to an ARM makes sense

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A refinance can go the other way, too. When interest rates are trending lower, it can be smart for homeowners to dump their fixed-rate home loans — and exercise their right to take up ARMs.

Adjustable-rate mortgages hold steady for a certain number of years, and then their rates become variable. The loans tend to start out with lower rates than fixed-rate mortgages, and the rates can adjust downward during periods of falling rates.

But there's always a risk that an ARM rate will eventually go higher. So, you could find yourself looking to refi back into a fixed-rate loan at some point.

5. If your credit score has improved

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People with low credit scores are often given mortgages on less-than-ideal terms, if they're able to get a loan at all.

Let's say you took out your mortgage when your credit score was only fair — in the mid-600s — and now it's considered good or even very good (say, in the upper 700s). Check your credit score to see if you might be able to get a better deal on your loan.

A 100-point improvement in your score could allow you to cut your mortgage rate by close to a full percentage point and save you tens of thousands of dollars in interest over the life of your loan.

6. If you'd like to shake out some equity

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If you've been making house payments for a while and have built up some equity in your home, you can do a refinance that will allow you to unlock some of that money and put it to work.

With a cash-out refinance, you pay off your existing mortgage and borrow a little extra, out of the equity. You might use the cash to improve your home — and make it even more valuable.

Money from a cash-out refi can have other uses, too. You might even open an investing account. But remember, it's loan money and you'll have to pay it back eventually.

7. If you can shake off pesky PMI

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With conventional home loans, buyers who do not make a 20% down payment are typically saddled with private mortgage insurance, or PMI. It's an additional fee tacked onto your monthly mortgage payment that offers the lender some protection if you default.

Refinancing can be a way to ditch PMI.

A lender won't require you to carry it once you've got more than 20% equity in your home, and any increase in your home's value counts toward your equity. So, if home prices are rising where you live, a new lender may not see the need for PMI.

8. If you can get rid of secondary mortgages

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If you've got a second mortgage — maybe a home equity line of credit you took out to pay for your new, tricked-out kitchen — a refinance can offer a great way to simplify your life.

You might be able to consolidate your housing debt into just one loan.

Second mortgages often have high interest rates, or variable rates with the ability to go higher. You might cut your current and future interest costs by refinancing into a single mortgage with a good rate.

9. If you want to buy out a co-owner

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Let's say you're divorcing — and you're the one who'll get to keep the house. Or, your dad co-signed on your mortgage and has been helping with the payments, but now you've got a good job and want to release Pops from that obligation.

In these scenarios, you'd refinance to take your co-owner off the mortgage and the title. And in the process, you might get a new loan on better terms, such as with a lower interest rate.

But obviously, you will have to buy out the other person — in other words, let him or her walk away with half the equity that has accrued. Your co-owner helped with that, so it's only fair.

10. If it will let you consolidate other debt

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If you're carrying credit card balances or have other loans at relatively high interest rates, you might do a cash-out refinance and use home equity to trade that debt for less expensive mortgage debt.

But be very careful. If you don't change the spending habits that got you into the other debt in the first place, you could find yourself struggling to make your mortgage payments — and put your house at risk.

Also, don't count on any big tax savings from a cash-out refi. The 2017 tax law makes it more difficult to deduct the interest on the cash-out portion of the loan.

If you aren't ready to refinance but have debt you need to tame, comparing debt consolidation loans using the new website Fiona won't hurt your credit score — and can probably save you a ton of money.