If you decide to refinance your home mortgage, your current mortgage will be replaced with a new mortgage loan with different terms. But why would a homeowner choose to refinance their mortgage? There are a few good reasons someone may decide to refinance their home. In this article we will look at the many reasons you may want to consider refinancing your home mortgage.
Changes to your interest rate
One of the most popular reasons homeowners decide to refinance their mortgage is because they are in a better position than they originally were when purchasing their home, particularly with their credit score, or there has been a change in the homebuying market, and by replacing their current loan with a new loan they may be able to obtain a lower interest rate than what they are paying on their current mortgage loan. By obtaining a lower interest rate, you may be able to save a significant amount of money over the life of your mortgage loan. You may also want to make a change to the type of interest rate your current mortgage loan has. By refinancing, you can switch from an adjustable rate mortgage (ARM) to a fixed rate mortgage, or vice versa.
Shorten the length of time it will take to pay off your mortgage loan
Sometimes, a homebuyer is not as interested in the amount of their monthly mortgage payment as they are in the amount of time their loan will take to pay off. Another great reason to consider refinancing your mortgage loan is to shorten the term of the loan so you will be able to pay your mortgage off sooner. Typically, you are able to shorten the term of your mortgage loan through refinancing if you are able to obtain a lower interest rate but are not concerned about lowering your monthly payment at the same time.
Reasons you should not refinance your mortgage loan
While it may be a good financial decision to refinance your home’s mortgage loan to make a change to the interest rate or to shorten the term of the loan, it is rarely a wise financial decision to refinance your mortgage loan for other reasons – such as to tap into your home’s accrued equity to cover the cost of a large purchase. While there are circumstances in which extending the life of your mortgage loan to cover the cost of a large purchase will make sense, these circumstances are rare and should be considered with caution.