Top 7 Reasons to Refinance My Home Loan

The world of residential refinancing can be a complex arena, but it doesn’t have to be. While every homeowner has their own unique reason for refinancing their home, we have found that the most common reasons are like

Reason 1 – Lower your monthly payment. This is most often referred to as a “rate & term refinance” Lowering your monthly payment is a basic mathematical function of the loan balance, loan term, and the interest rate. This is often a necessary approach when a family budget get tight and you need some breathing room, the rate market becomes more favorable (rates are going down), or a substantial amount of your original loan balance has been paid down and a refinance would allow you to have a lower monthly cost of ownership.

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Reason 2 – Reduce your rate to save on long term interest. The total amount of interest homeowners pay over a 30 year period of time can be in the tens of thousands or even hundreds of thousands, depending on your loan amount and interest rate at time of purchase. A rate & term refinance reduces the amount of your total interest paid over the life of ownership as a function of your new interest rate being lower than your current interest rate. Your monthly payment will also decrease, but in this scenario the primary focus is to decrease the total out of pocket amount paid in interest over the lifetime of homeownership. Homeowners who refinance for this reason typically save tens of thousands of dollars over the course of time, provided they take action while rates are favorable, and they are in the first few years of homeownership.

Reason 3 – Shorten your term. Most homeowners who have fixed rate loans have them for a 30-year period because the payment is affordable. There are times in the market when rates have declined and your loan balance is low enough, that converting your 30-year loan into a 15 year loan is affordable. Thus achieving several key factors, the most important being: a reduction in your total interest paid over the lifetime of your homeownership, and reducing the term of your loan (so your home is paid off faster). The best time to refinance into a 15 year loan is when your finances can sustainably pay the monthly payment associated with a shorter term loan and when your net gain from doing so results in paying off your home sooner than originally scheduled or saving thousands of dollars of interest over the lifetime of homeownership. If a 15-year refinance is too steep for your budget, consider a 20 year fixed loan as it may help you still accomplish your desired outcome, while not weighing down so much on your monthly affordability.

Reason 4 – Consolidate debts. If you have multiple car payments, credit cards, student loan debt, and other consumer debt(s) it may be in your best interest to do a cashout refinance in order to consolidate all those payments into a new mortgage loan. When your home has enough equity and you can financially benefit from paying off some of these other lines of credit, a cashout refinance can save hundreds or even thousands of dollars in out-of-pocket payments per month. Now, you will incur an increased mortgage balance as a result of your home equity being used to pay off your associated debt(s); however, because the monthly payment is spread over a 30 year term (unless you choose shorter) the out of pocket monthly payment you will make is lower than the combined total of all the monthly payments made individually. This type of refinance works particularly well in an overall real estate plan that includes selling and re-buying a home in the near future, say 5-10 years in the distance. In this manner, you’ve effectively used the home equity to pay off your debt(s), while coordinating your future home sale proceeds to account for out the cashout refinance you just did in paying off said debt(s).

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Reason 5 – Make upgrades or remodel your home. As much as we would like to, not everyone has that extra hundred grand sitting around in their savings account to install a pool and remodel the kitchen whenever they would like. As the name suggests, a cashout refinance allows for current home equity to be used to generate the cash in hand a homeowner will need to tackle those desired remodel or upgrade projects. This is a particularly popular refinance option when home values have increased dramatically in a relatively short period of time, or when a homeowner is preparing to sell and wants top dollar in the market from having done upgrades that would make it the nicest home on the block. This type of cashout refinance allows homeowners the chance of achieving their desired changes without being handcuffed to their ability to chip away at it only when financial windfalls come to pass.

Reason 6 – Remove mortgage insurance. Purchase mortgage loans with less than twenty percent down come with Mortgage Insurance. This is an additional monthly expense that covers the monthly premium for the insurance policy the bank takes out against the homeowner in the event of default on payments. When market appreciation helps bring home values north of twenty percent of equity, homeowners can do a rate & term refinance or cashout refinance to effectively remove the mortgage insurance. The only real stipulation is that the refinance must be supported by a eighty percent or lower loan to value ratio. In some cases, the removal of mortgage insurance saves the homeowner(s) hundreds of dollars, which helps with affordability, but as we also mentioned at the beginning of this section, the insurance policy you have been paying for covers the bank, not you. Strongly consider the rate & term refinance or cashout refinance if you have mortgage insurance and know you have twenty percent or more equity in your property.

Reason 7 – Change your loan type. Getting out of one loan type and into another is done for a multitude of reasons. For example, a veteran who used their VA eligibility to purchase a home in Dallas but wants to keep that home as a rental when they move to San Diego might have to refinance out of that VA loan and into a conventional loan so that they can use their VA eligibility on their purchase in San Diego.

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Another example is a first-time homebuyer who used FHA financing when they bought their home but wants to refinance into a conventional loan while the home has twenty percent equity. This also accomplishes the elimination of their mortgage insurance.

Also take into consideration that are even unfortunate reasons people refinance property such as death where the surviving spouse needs a monthly payment reduction and divorce where the mortgage obligation needs to be shifted to the individual who stays on title having the mortgage obligation in their name only.

Ultimately, homeowners can have many reasons why they would want to refinance, even if it’s not listed here. No matter what your reason(s) may be, click here to discuss your refinance scenario with a qualified mortgage professional today. You can also APPLY NOW if you already know what outcome you need and would like to get started right away.

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If you would like to speak with our team about your home loan questions, please complete the form below. You can also start your loan application online by APPLYING NOW.

Rates & Fees Disclosure:
^‡ The payment on a $300,000 30-year fixed-rate VA loan at 3.000% with a 80% loan-to-value ratio is $1,292.01 with 0 (zero) origination points due at closing. The annual percentage rate (APR) is 3.235%. Payment does not include tax and insurance premium impounds. The actual payment amount will be greater. By refinancing your existing loan, the total finance charges may be higher over the life of the loan. Some state and county maximum loan amount restrictions may apply. Appraisal fee of $600, Processing Fee of $895, Underwriting Fee of $795 included in APR calculations with borrower paying 0 (zero) loan origination points.

^‡ Based on Mortgage Heroes internal data.