Why should I refinance?

Like any major financial decision, mortgage refinancing comes with its own particular benefits and drawbacks. And those pros and cons will change depending on your current situation and future goals.

1. To Lower Interest Rates

If your current mortgage has a high interest rate, or you’re hoping to pay off your loan faster, refinancing can help.

Switching from a longer-term mortgage to a shorter-term mortgage will typically lower your loan interest rate because the lender knows you will pay them back over a shorter period. But, switching to a shorter-term mortgage will likely increase your monthly payment. So the total amount will be less but you’ll be paying more per month. Compare multiple offers and calculate fees and closing costs to ensure what you save on interest rates is worth the refinance.

2. To Shorten Mortgage Loan Term

Similar to what’s stated above: refinancing can significantly reduce your loan term by increasing monthly payments. Note that this is not necessarily a big increase. It mostly depends on what loan amount and rate you currently have.

Refinancing a $100,000 30-year fixed-rate mortgage with a 9% interest rate to a 15-year fixed-rate mortgage of the same amount with a 5.5% interest means your monthly payments would only increase by $10-$20. That’s a pretty small difference. But, refinancing a $100,000 30-year fixed-rate mortgage that already has a 5.5% interest rate to a 15-year fixed-rate mortgage of the same amount with an even lower interest rate could raise monthly payments by over $100.

Again, the trick is to compare offers and do the math before determining whether to refinance.

3. To Lower Monthly Payments

Limited or No Cash-Out Refinancing [see post: Cash Out Refinance] can lower monthly costs simply by switching your current mortgage for a longer-term loan of the same amount. You might swap a 15 year term loan for a 30 year term, for example. Refinancing in this case makes sense if you are planning on staying at the same property for a while.

4. To Consolidate Debt

If you’ve built up a lot of debt (either through credit cards or taking out other loans), a cash-out refinance[link to post: Cash out Refinance] can help to temporarily lessen your monthly payments and give you more time in which to fully pay off your debts. And consistently making on-time payments will in turn boost your credit score.

That being said, neither increasing the term of your mortgage loan nor receiving cash through refinancing will erase all your debt. Yes they will buy you more time, but unless you have a solid financial plan, refinancing to consolidate debt may not be a good option for you.

5. To Remove a Co-Borrower

While lenders typically allow you to remove co-borrowers, especially if they are deceased or the loan has already been completely paid off, the removal process can be pretty complicated. In the case that your current lender refuses to release your co-borrower from the loan, refinancing your existing mortgage loan is a possible solution. But the loan options available to you will be based off of your income and assets alone. Depending on what your previous co-borrower brought to the table, this could mean that you won’t qualify for as many loans as you did when you applied with them.

6. To Help Pay For A Financial Emergency

Cash-out refinancing [link to post: Cash out Refi] will provide you with quick money. In the case of a sudden death, illness, or serious injury in the family, this is one solution for raising funds. It may not, however, be the best solution since you will still need to repay the loan amount later, with added interest. Look at your options carefully before making a decision.

Know that refinancing is not a panacea for financial difficulty. But it can lower monthly costs, shorten loan terms, and consolidate debt.

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