Best reasons to refinance your mortgage
Lowering your interest rate
Known as a “rate-and-term” refinance, this is the most popular reason homeowners refinance a home loan. Homeowners with a higher interest rate on their current loan may benefit from a refinance if the math pans out — especially if they’re shortening their loan term. Shorter-term mortgages typically have lower interest rates than longer-term mortgages because you’re paying back the loan in less time.
If you have a hefty amount of high-interest debt on credit cards or personal loans, a cash-out refinance may help improve your cash flow and save you money in the long term, possibly even if you take a slightly higher mortgage rate.
Getting rid of mortgage insurance
If you have a home loan with private mortgage insurance (PMI), a refinance could help lower your monthly costs. This is especially true if you have a loan insured by the Federal Housing Administration, or FHA. While FHA loans can be a viable path to homeownership for borrowers with little savings or not-so-stellar credit, they come with a big downside: mandatory mortgage insurance. After paying an upfront premium of 1.75 percent of the loan amount, most FHA borrowers continue to pay an annual mortgage insurance premium of 0.85 percent of the loan amount for the remainder of the 30-year term. To eliminate PMI, homeowners can refinance an FHA loan into a conventional mortgage once they gain 20 percent equity in their home.