Why and when should you refinance your mortgage?

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Before you begin, consider why you want to refinance your home loan. Your goal will guide the mortgage refinance process from the beginning.

• Reduce the monthly payment. When your goal is to pay less every month, you can refinance into a loan with a lower interest rate. Another way to reduce the monthly payment is to extend the loan term — say, from 15 years to 30. The drawback to extending the term is that you pay more interest in the long run.
• Tap into equity. When you refinance to borrow more than you owe on your current loan, the lender gives you a check for the difference. This is called a cash-out refinance, and here’s how it works. People often get a cash-out refinance and a lower interest rate at the same time.
• Pay off the loan faster. When you refinance from a 30-year mortgage into a 15-year loan, you pay off the loan in half the time. As a result, you pay less interest over the life of the loan. There are pros and cons to a 15-year loan. One downside is that the monthly payments usually go up.
• Get rid of FHA mortgage insurance. Private mortgage insurance on conventional home loans can be canceled, but the Federal Housing Administration mortgage insurance premium (MIP) you pay on FHA loans cannot in many cases. The only way to get rid of FHA insurance premiums is to sell the home or refinance the loan when you have accumulated enough equity. Use a home value tool below to find out how much your home is worth, and subtract your mortgage balance to calculate your equity.
• Switch from an adjustable to a fixed-rate loan. Interest rates on adjustable-rate mortgages can go up over time. Fixed-rate loans stay the same. Refinancing from an ARM to a fixed-rate loan provides financial stability when you prefer steady payments.

Source: nerdwallet

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