10 Reasons Why You Should Refinance

Every financing situation is different, and as life continues to change, there are reasons why the home loan you have today may not be the best option for you tomorrow. Life can make refinancing your mortgage necessary, or perhaps just advantageous. Here are some of the best reasons to consider refinancing your home.

1. Reduce your interest rate. One of the primary reasons people consider refinancing is to lower the interest rate of their home loan. In 1981 the average mortgage interest rate was over 16%. It’s hard to imagine a home loan rate like that when 2020 home loan rates are hovering around 4%. If you were to compare the principal and interest costs alone of a $300,000 home loan from 1981-2020, there is a tremendous difference.
   
   Imagine a $300,000 home loan principal and interest with a 30-year loan in:
   
   
   • 1981 with an interest rate of 16%. You would pay:
     
     
     • $4,034 per month
     • $1,452,338 total payments
       
   • 2020 with an interest rate of 4%. You would pay:
     
     
     • $1,432 per month
     • $515,609 total payments
       
       
   While that may be an extreme example, it provides insight into why refinancing pays off as rates lower. Let’s take a look at a more realistic example comparing rates from 10 years ago — 2010-2020.
   
   Imagine a $300,000 home loan principal and interest with a 30-year loan in:
   
   
   • 2010 with an interest rate of 4.69%.
     
     
     • $1,554 per month
     • $559,480 total payments
       
   • 2020 with an interest rate of 4%.
     
     
     • $1,432 per month
     • $515,609 total payments
   
   With a rate change of only .69%, you can see a monthly reduction in your principal and interest of around $120 per month, and savings over the life of the loan of around $44,000. Using this example, if you were to estimate refinancing fees at approximately $3,500, it would take you around 2 years to break even and make refinancing worthwhile for you. This quick calculation can help you determine if refinancing for a lower rate is right for you.

2. Switch from an adjustable rate mortgage (ARM) to a fixed rate mortgage. An adjustable rate mortgage has an interest rate that can vary throughout the life of the loan. This means that when you first get the loan, the rate you are paying is temporary and can go up or down over the life of the loan. The rate at which the ARM can go up or down follows an index and margin rate. For example, if the index rate is 1.3% and the margin rate is three points, you add them together to determine what your interest rate would be for that time period — 4.3%.
   
   
   • When does it make sense to switch from an ARM to a fixed rate? If rates were low when you obtained your ARM, but rates appear as if they are going to climb or are already beginning to climb, you may want to consider avoiding any potential increase in rates over time. There is the scary factor of the unknown with an ARM because you don’t know how high — or low — rates might actually go. A fixed rate mortgage is fixed or locked in for the life of the loan. That provides a sense of financial security knowing you are locked in at your current rate and you can budget your finances accordingly.
3. Use the equity in your home. This is another popular reason people consider refinancing their home loan. There are two main ways you may have gained equity in your home.
   
   
   • Pay Down Principle. There are a few ways you can pay down principal, which is the amount you owe excluding interest. The first way to reduce the principal is to continue making your monthly payments over time. The second way is to make additional payments and apply them to principle, as opposed to making a pre-payment.
   • Home Value Increased.  In some areas of the country, in good economic times, home values have been rapidly increasing. For example, in California, home values have soared over the last few decades. When you apply for refinancing, your home is appraised for its current value. If home values have increased, you have more equity in your home to pull from.
     
     
   There are many ways in which you can use the equity in your home — building an addition, putting in a pool or outdoor kitchen, remodeling parts of your home, and even getting a cash-out refinance.

4. Consolidate debt. Another key reason why many people consider refinancing is to consolidate debt. That debt may come in the form of student loans or high interest credit cards you’d like to pay off. Overall, home loan interest rates are typically lower than other types of interest rates; therefore, you can leverage equity in your home to consolidate your debt and reduce your total monthly expenses. It’s important to understand the costs of refinancing and take those into consideration when calculating the advantages of debt consolidation.
5. Reduce the term of your loan. As interest rates change, some look to a lower interest rate as an opportunity to reduce the term (or length) of their home loan. For example, if interest rates have recently lowered, or perhaps your financial situation has improved, you might want to lower the term of your home loan to save money over time and pay off the loan quicker.
6. Eliminate mortgage insurance. If you have a VA loan, you don’t have mortgage insurance. If you don’t have a VA loan and didn’t have enough for a 20% down payment, you’re likely to have some type of mortgage insurance, whether it’s private mortgage insurance (PMI) or mortgage insurance premium (MIP). If you have built up more than 20% equity based on the current appraisal of your home, you can use refinancing as a tool to eliminate that monthly mortgage insurance fee.
7. Your financial situation has changed. If your financial situation has changed over time, you might want to consider refinancing to either reduce your monthly payment, lower your term, reduce mortgage insurance, or for some other reason. Refinancing can be beneficial if your financial situation has improved or if it has become more challenging.
8. Consolidate two mortgages into one. If you have two mortgages, refinancing can consolidate both into one — assuming you meet the criteria necessary with equity, value, credit, and more. The advantage to consolidating is that a second mortgage typically has a higher rate than your first mortgage. Consolidating two into one can reduce your overall mortgage payments.
9. Your life situation has changed. There are many reasons you may want to refinance based on your current life situation. For example, a divorce might mean that you want to remove another person from the loan, or even buy someone else out of their share if it were a financial partnership. Consider what is going on currently in your life and how it may affect your mortgage payments.
10. There are other reasons to refinance your mortgage. There are many other reasons you may consider refinancing. Since every individual’s financial situations are different, the best way to find out if refinancing is right for you is to speak with a loan officer and explore your options, needs, and goals.

To learn more about PenFed home loans and refinancing options that are right for you: