18 Reasons to Refinance Your Mortgage

September 14, 2016 1 Comment »
18 Reasons to Refinance Your Mortgage

There are many reasons to refinance your mortgage, some obvious and some a bit more obscure and/or different.

I figured I’d compile a list of the many reasons I can think of to refinance. Some of the situations are complete opposites of one another and will depend on your unique financial goals and/or risk appetite.

1. To get a lower interest rate

This one is the no-brainer that everyone will agree on. If you want a lower interest rate then refinancing is the way to go, assuming mortgage rates are lower now than when you took out your original mortgage.

The classic rate and term refinance allows homeowners to reduce their interest rate so they can enjoy a lower monthly payment. The potential downside to this is resetting the clock on your mortgage, though you can also go with a shorter term at the same time.

2. Because your borrower profile has improved

Another reason to refinance has to do with your unique borrower profile. Say you improved your FICO scores over the past year and cleaned up some other negative stuff. Or perhaps your home value increased enough to push your LTV into a lower tier.

If your borrowing profile has improved significantly you might be entitled to a much lower interest rate than what you previously qualified for. This could be a good time to inquire about a refinance to save some money each month.

3. To change loan products (FHA to conventional)

It could also be that you started out with a loan product you weren’t too fond of because it was the only way to qualify. But now that you’re a better borrower you’ve got more options to choose from.

Instead of paying mortgage insurance for life on an FHA loan, you can refinance your mortgage into a conventional loan instead, thereby removing the lifetime MI and potentially snagging a lower interest rate at the same time.

4. To reduce the loan term

Then we’ve got the folks who want to aggressively pay down their mortgages, or at least not pay them down at a snail’s pace. If this is you, there is a huge benefit to refinancing from a 30-year fixed into a shorter term loan such as the 15-year fixed.

These shorter term mortgages also come with lower interest rates so you can pay your mortgage off a lot faster without potentially breaking the bank, depending on the rate you had and where rates are today.

5. To increase the loan term

The exact opposite group might refinance to extend their loan term, which will cost them a lot more in interest but save them in monthly payment.

Not everyone wants to pay down their mortgage in three years and for some it’s difficult to make large monthly payments. Perhaps a change in circumstance means a 30-year term is more sustainable moving forward.

6. To switch to a fixed-rate mortgage

We’ll put this in the common reasons to refinance pile. Just about everyone will suggest that you refinance out of an ARM and into a fixed mortgage if you think rates are rising.

The same is true if your hybrid ARM that was fixed for X amount of years is about to hit its first adjustment. To avoid the rate reset you can move to a FRM before that happens.

7. To go adjustable instead

Of course, things also move the other way. It’s entirely possible to switch from a boring old 30-year fixed mortgage to an ARM if you want some payment relief, or simply feel you’re overpaying.

It’s also possible to refinance out of one ARM and into another ARM to not only reset your rate but also reset your fixed-rate period on the new ARM. Plenty of wealthy individuals move from ARM to ARM to take advantage of cheap short-term rates.

8. To go fully-amortized

Another common scenario might be a borrower with an interest-only mortgage that is facing a recast. The IO period typically only lasts 10 years before the mortgage must be paid back in full.

To avoid a steep monthly payment increase, a homeowner might opt to refinance out of the IO product and into something fully-amortizing. Or perhaps even another IO product.

9. To go interest-only

Conversely, a borrower sitting on a lot of home equity might decide it’s time to make interest-only payments to improve monthly cash flow.

This can also free up cash for other expenditures or investments the homeowner may be looking at. After all, you don’t always want all your eggs in one basket if you’ve already got a ton of them in your house.

10. To get cash

Speaking of cash flow, you might refinance simply to get cash out of your home. The age-old cash out refinance is a great way to free up your home equity and put it to work.

Perhaps you want to make some home improvements, or buy a second home or an investment property. Maybe you want to diversify and move your cash out of your home and into the stock market instead.

11. To buy someone out

In certain situations, you may need/want to add or remove someone from title and/or the mortgage. If this is the case, a refinance can be an appropriate vehicle to do.

Maybe there was a divorce and you’re buying someone out. Or maybe you’re ready to fly solo and remove mom and dad as co-signers. Again, this could be a good time to snag a lower interest rate or make a product change too.

12. To protect your investment

You might also refinance to tap some of the equity you’ve gained over the years. Home values are known to seesaw over time and it could be a good opportunity now to get some of that cash for the future.

It doesn’t hurt to put aside some dry powder, especially when interest rates are low. And if you can do so while values are high and your property is owner-occupied, that cash can be put to work elsewhere. Diversify.

13. To drop PMI

I spoke about switching loan products to drop mortgage insurance, but you can also dump private mortgage insurance by refinancing if you’ve got a low enough LTV.

If your home increased in value and/or you paid it down enough to ditch the PMI, a refinance might save you a lot of money via both a lower interest rate and from the absence of said PMI. It’s a one-two punch!

14. To apply a lump sum to lower your LTV

Similarly, you might have come across some money recently and as such have the ability to take a big chunk out of your mortgage balance.

If you’re one of those people who likes to pay down the mortgage as quickly as possible, applying a lump sum to lower the balance (and the LTV) will lead to a lower monthly payment, assuming you refinance (or recast). A lower interest rate and/or shorter term could apply here too.

15. To consolidate multiple mortgages

Here’s a classic reason to refinance. You’ve got multiple mortgages (hopefully just two) and want to consolidate them into one loan.

A refinance is often a great way to accomplish this while also winding up with a lower interest rate. Many second mortgages have sky-high interest rates or are adjustable (hello HELOC), so this is can be a conservative money-saving move.

16. To consolidate other debt

Another typical reason to refinance is to consolidate other non-mortgage debt, such as credit cards and other higher-APR debt.

Mortgages tend to have the lowest interest rates around, and they allow you to pay the debt very slowly, which makes it easier to manage. Just be careful not to go on a spending spree because you still haven’t paid off the old debt, you’ve merely transferred it.

17. To access a program before it’s gone

You may also want to refinance to take advantage of a loan program before it’s gone.

This could be a specialty program like HARP, which allows underwater borrowers to refinance. Or simply a program a specific lender is offering for a limited time. If you like what you see it might be wise to bite now to avoid missing out.

18. Because you can

One final reason I can think of to refinance is simply because you can, assuming things change for the worst. There’s never a guarantee you’ll qualify for a mortgage in the future. Heck, it’s possible you might need today’s low interest rates just to stay below the DTI limit.

You could also run into some sort of financial hardship, or rent out your home that you later wish to refinance. Perhaps it makes sense to refinance now while you know you qualify and the home is owner-occupied. The terms should be better.

One Comment

  1. Duncan Pattinson October 6, 2016 at 7:02 am -

    In the UK with rates so low it pays to remortgage. Homebuyers and investors just need to watch out for redemption fees. We see many remortgage clients wanting conveyancing quotes from the Homebuyer Conveyancing panel

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