If you own a home, it’s a good idea to reassess your loan periodically to see if you can find a better deal elsewhere. Lower interest rates, an improved credit score, or different loan terms may allow you to save tens of thousands of dollars in interest.
Follow these tips to answer the big question: “Should I refinance my mortgage?” Here are some reasons refinancing could be a good idea:
- You can save on interest
- You can pay off your loan sooner
- You can change to a different type of loan
- You can tap into home equity
1. You can save on interest
The number one reason to refinance a mortgage is to save money. For most people, that comes from a lower mortgage interest rate. Don’t underestimate the power of even a small rate change. If you can save just 1% in interest, it could be a massive savings.
For example: On a $100,000 loan with a 30-year term, you would pay about $93,000 in interest over the life of the loan at 5% APR. At 4%, you would pay about $72,000 in interest. That’s about $20,000 in savings — and even bigger loan balances translate to even more savings.
Depending on when your current mortgage started, you may be able to save a bundle. If you’ve been paying your loan on time and handle other loan accounts well, your credit score may be better than when you applied for your current mortgage. That can qualify you for even more savings, as a higher credit score can qualify you for better rates.
Learn More: How to Improve Your Credit Score
2. You can payoff your loan sooner
One of the most popular mortgage terms is 30-years. This is beneficial to borrowers because they get the lowest possible monthly payment. However, if you are able to afford a little more each month, you may be able to pay off your loan sooner as another path to savings.
Refinancing from a 30-year loan to 20, 15, or 10 years, for example, could cut a decade or two off of your payoff period. That means fewer years of payments and lower interest costs overall. As an added bonus, many lenders will give you a lower interest rate on a shorter-term loan. That can give you a double-dose of savings compared to your current mortgage.
While a higher monthly payment means you have less to spend right now, if you can afford to refinance it can typically save you money on interest. Just think about what you’ll do with that extra cash each month once your home is paid off.
How To: Get the Best Mortgage Rate
3. You can change to a different type of loan
When you were shopping for mortgages, you probably came across loans with fixed and variable interest rates. Between ARMs (adjustable rate mortgages) and points and other details, it’s easy to get overwhelmed. But now that you’ve had some experience with your current mortgage, you might think back and wish you could have done things differently.
If you started out with a variable rate loan and want to switch to a fixed rate to lock in what you’ll pay for the rest of your loan’s term, you could be in the perfect position to refinance. Getting rid of future uncertainty is a popular reason to refinance. Current low-rates make it a great time to pull the trigger.
4. You can tap into home equity
If your home has gone up in value since you bought it or you’ve made big progress paying down your mortgage, you could be sitting on a huge pile of home equity. You shouldn’t necessarily access that equity without a good reason, but there are a lot of good reasons to pull some of the value out of your home.
Kitchen, bathroom, basement, and other home renovation projects may add value to your home. If you’re short on cash, a home loan could be an ideal way to pay. You can even work with your lender for a cash-out mortgage refinance. In this scenario, you would refinance your loan at a higher amount than the current one. A cash-out refinance means you would get a check for the difference.
Learn More: How to Pay Off Debt With a Home Equity Loan
Should I refinance my mortgage? Yes, if the numbers add up
If you refinance and pick a loan with high fees or a higher interest rate, you could wind up losing a lot of money. A higher interest rate means a higher cost for every single dollar you borrow. That’s virtually never a good deal.
Small interest savings may not be worthwhile if the new lender charges significant closing costs. That’s why you should always do the math when deciding on a refinance. Don’t just follow your instincts, follow your dollars. If the numbers work out in your favor, refinancing your mortgage could be a great idea.