Refinancing your home loan is a process of obtaining a new loan with better terms to replace an existing home loan.
- Lower interest rates
One of the primary reasons people refinance their home loans is to take advantage of lower interest rates. If your credit score has improved since you first got your home loan, or if market interest rates have fallen, you may be able to refinance your mortgage with a lower interest rate. A lower interest rate can reduce your monthly mortgage payments and save you money over the life of the loan.
- Shorter loan term
Another way to save money when refinancing is to opt for a shorter loan term. Shorter loan terms often come with lower interest rates and can save you a considerable amount of money in interest payments over the life of the loan. For example, if you have a 30-year mortgage, you may be able to refinance into a 15-year mortgage with a lower interest rate. Although your monthly payments may be higher, you will pay off your loan sooner and save money on interest payments.
- Convert to a fixed-rate mortgage
If you currently have an adjustable-rate mortgage, refinancing into a fixed-rate mortgage can help you save money. Adjustable-rate mortgages typically have lower interest rates than fixed-rate mortgages but can increase over time, resulting in higher monthly mortgage payments. Refinancing into a fixed-rate mortgage can protect you from future interest rate hikes and provide stability and predictability for your monthly mortgage payments.
- Cash-out refinancing
Cash-out refinancing is a process of refinancing your home loan for more than you currently owe and receiving the difference in cash. Cash-out refinancing can help you access the equity in your home and provide funds for home improvements, debt consolidation, or other expenses. Although cash-out refinancing can result in a higher mortgage payment, it can also help you save money by consolidating high-interest debts into a single, lower-interest loan.
- Eliminate mortgage insurance
If you have an FHA loan or a conventional loan with less than 20% down payment, you are required to pay mortgage insurance. Mortgage insurance protects the lender in case you default on your loan and can add hundreds of dollars to your monthly mortgage payment. Refinancing into a conventional loan with a 20% down payment can eliminate the need for mortgage insurance and reduce your monthly mortgage payment.