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.
But most will be appealing at times when interest rates are low, as they are now.
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 your mortgage 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 to avoid that.
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.
It’s also possible that your new loan amount could fall below the conforming loan limit, thereby opening up new loan programs and potentially providing even greater savings.
In short, if your borrowing profile has improved significantly since you first took out your home loan, 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
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 for a mortgage, perhaps due to a low credit score.
But now that you’re a better borrower with more home equity (thanks to all that home price appreciation) you’ve got more loan options to choose from.
For example, it could make sense to refinance your FHA loan to a conventional one to save money on MIP costs.
Instead of paying mortgage insurance for life on an FHA loan, you can swap your old, more expensive mortgage for one backed by Fannie Mae or Freddie Mac instead.
This will allow you to remove that pesky and expensive lifetime MI while potentially snagging a lower interest rate at the same time. Talk about a win-win!
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 over the next three decades.
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. You pay a lot less interest and own your home much sooner.
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 very difficult to make large monthly payments.
Perhaps a change in circumstance means a 30-year term is more sustainable moving forward.
Others may simply want to slow mortgage repayment and put their money into alternative investments, whether that’s the stock market or a new investment property.
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 interest rates will rise.
The same is true if your hybrid ARM that was fixed for X amount of years is about to hit its first rate adjustment.
For example, if you originally took out a 5/1 ARM and it’s nearing the 60-month mark.
To avoid the costly rate reset you can move to a FRM before that happens. And with rates so low today, you might even get a lower fixed rate than what you had on your ARM.
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 obtain a new (hopefully lower) rate but also restart 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 while they put their money to work elsewhere.
8. To go fully-amortized
Another common scenario might be a borrower with an interest-only mortgage who 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 to extend that benefit.
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 out of your home
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 elsewhere.
Perhaps you want to make some home improvements, or buy a second home or an investment property. Maybe you need some money to pay for college tuition.
Or you simply 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 so.
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 and/or make a loan product change too assuming it’s favorable.
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 home values are high and your property is owner-occupied, that cash can be put to work elsewhere. Perhaps to buy another home if property values drop. 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 from the absence of said PMI.
It’s actually a one-two punch because the lower LTV can help you qualify for a lower interest rate as well!
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).
But paying extra won’t lower future payments unless you do one of those two aforementioned things.
So those looking for actual payment relief could do a cash in refinance.
A lower interest rate and/or shorter loan term could apply here as well to really speed up the loan payoff if that’s your goal.
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 a single loan.
A refinance is often a great way to accomplish this, especially if you wind up with a lower interest rate to boot.
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, especially right now, and they allow you to pay the debt back 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.
It’s not an excuse to spend more and accrue more debt, it should be a strategy to get out of debt more economically.
17. To access a loan program before it’s gone
You may also want to refinance to take advantage of a home loan program before it’s gone.
This could be a specialty program such as HARP, which allowed underwater borrowers to refinance, or a guideline change like the FHA’s move to lower the max LTV on cash out refis from 85% to 80%.
There may also be a program a specific lender is offering for only a limited time. If you like what you see, it might be wise to bite now to avoid missing out.
18. Simply because you can
One final reason I can think of to refinance is simply because you can, assuming things change for the worst financially.
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 like a job loss, or rent out your home that you later wish to refinance.
Just take COVID-19 as an example of a completely unforeseen situation that has affected millions of homeowners.
Lots of these folks may not be able to refinance their mortgages due to missed payments or forbearance requests.
Perhaps it makes sense to refinance now while you know you qualify and the home is owner-occupied. The terms you receive should be better.