1. Get a Lower Interest Rate
Getting a lower interest rate is the most popular reason to refinance a mortgage. It simply means you are swapping a higher interest rate for a lower one, which can save you considerably on your monthly mortgage payments. It can also help you save thousands of dollars in interest over the life of your loan.
For example, let’s say you have a $250,000 mortgage with a 30-year fixed rate of 6.5 percent. Your monthly mortgage payment is approximately $1,700. If after five years of owning your home you refinanced to a mortgage with an interest rate of 4 percent, your monthly mortgage payment would be approximately $1,200 — a savings of $500 per month.
2. Switch Your Mortgage Type
When you purchased your home, you selected a specific loan type, such as a 5/1 ARM, a 15-year fixed rate, or 30-year fixed rate. When you refinance, you have the option of changing that loan type to take advantage of the benefits of that other type.
Suppose you have an adjustable-rate mortgage (ARM) that offered great low introductory rates, but the rate is about to increase. By changing to a fixed-rate mortgage, you will have the comfort of locking in a rate that won’t change, as well as getting a consistent monthly payment.
Or perhaps when you purchased your home, you didn’t qualify for a VA loan, but now you do. You could refinance and take advantage of the benefits of a VA loan, like no PMI and lower interest rates than conventional loans.
You can also switch from a 30-year fixed rate to a 15-year fixed rate to take advantage of a lower interest rate and pay off your mortgage faster.
3. Get Money for Home Improvements
If you have enough equity in your home, you may be able to do a cash-out refinancing to fund a kitchen remodel, add new siding, or complete a home improvement project you’ve been dreaming about. With cash-out refinancing, you refinance your current mortgage for more than the amount you currently owe, and keep the extra money to spend as you wish.
For example, if your current mortgage balance is $150,000 on a home that’s worth $250,000, you could refinance your mortgage for $175,000. Then you’d get $25,000 to spend on improving your home. Just be sure you’re able to refinance at a lower interest rate than you are currently paying.
Many homeowners prefer a cash-out refinance to a home equity line of credit (HELOC) for home improvement projects because the interest rates on a cash-out refinance are often lower than that of a HELOC. Also, a cash-out refinance replaces your existing mortgage, while a HELOC is an additional loan on top of your existing mortgage. You will have to pay closing costs to refinance your mortgage, so be sure to weigh the options to see if a cash-out refinance makes financial sense for you. Zillow’s refinance calculator has a cash-out refinance option under Advanced.
4. Build Equity Faster
Shortening your loan program will reduce the portion of your monthly payment that goes toward interest and will allow you to pay off your principal faster — and build equity faster. Typically, you will have a lower interest rate with a shorter loan term (e.g., 20-year loan vs. 30-year loan).
Depending on your current interest rate, you may be able to maintain or reduce your monthly payment while paying the loan down faster.
For example, if you have owned your home for five years and have a 30-year fixed mortgage rate at 6.5 percent on a loan that has a balance of $250,000, your current payment would be roughly $1,700. But, if you were to refinance to a 20-year loan at 3.5 percent, your new payment would be $1,450. That is a monthly payment reduction of about $240 and an interest savings of nearly $160,000 over the life of the loan. You would shorten your loan term by five years and gain home equity faster.