Purchasing a home is a significant investment and expense. Because of the high expense, most people will finance the majority of the purchase with a mortgage. While mortgages are long term loans, which often range up to 30 years in length, most people will refinance their mortgages several times. There are several particular situations when it would make the most sense to refinance your mortgage.
Interest Rates are Low
One situation that would make sense for refinancing your mortgage is when interest rates are low. Mortgage interest rates can fluctuate a lot over a long period of time. If mortgage rates have fallen and the rate on a typical mortgage today is less than your existing rate, it could make sense to refinance into a lower interest mortgage. In general, it would make sense to refinance if the rate is 50 basis points less than your current rate.
Another situation in which it could make sense to refinance your mortgage is if you have to pay down your mortgage a lot over time and would now like to recast the amortization. If you have paid down your loan for several years consistently, your loan balance will likely be significantly less than the original amount. If you are looking for a good way to lower your monthly payment, recasting the loan into a new 30 year mortgage could be an easy way to do that.
Take Cash Out
The third situation where it would make sense to refinance your mortgage is if you are looking to take cash out of your property. When you own a home, your home equity will hopefully increase every year due to value appreciation and continued amortization of your home loan. If you have more than 20% equity in your home you will likely qualify for a cash out. The cash out you receive will be applied to your new mortgage balance but can’t be used for any purpose you want. Many people use the cash out from their phones to make home repairs, take a vacation, or invest elsewhere.
One of the wisest reasons to refinance your mortgage is to consolidate your existing debt. Similar to when you take cash out of the property, a consolidation mortgage loan will use your existing home equity to pay off higher interest loan. In some cases this will include paying off a higher interest second mortgage or home equity line balance. You could also use the consolidation loan to pay off other types of debt as well, including credit cards, student loans, or personal loans. In these situations you are replacing a high interest loan balance with a low interest and tax deductible loan.