3 Top Reasons to Refinance Your Home

What are the top reasons to refinance your home? Find out when and why should you refinance your mortgage.

1. Refinancing to Save Money on Your Mortgage Loans

The number one reason to refinance a property is to replace your existing mortgage with a new loan with lower interest rates.

If market interest rates have fallen since you first purchased your property, then you may have an excellent reason for refinancing your home. By lowering your mortgage rates by 2 to 3%, you can easily save up to a few hundred dollars on mortgage payments every month depending on how much you are borrowing.

Since refinancing allows you to alter your mortgage duration, you can make use of it to shorten your mortgage term so you will end up paying less interest overall. Of course you will need to make sure that your income is able to keep up with the bigger monthly mortgage payments.

While these savings do sound great reason to refinance, you will have to factor in closing costs as well - Origination fees, appraisal fees, application fees and other charges can add up to 2.5% of the total mortgage amount.

2. Refinancing to Alter Your Mortgage Term and Type

Another reason for mortgage refinancing: Your financial needs may have changed since purchasing your home so refinancing allows you to alter your mortgage to better suit your current situation.

For example: You have been retrenched or your income has taken a dip so you may want to stretch your mortgage term from 15 to 30 years. This lowers your monthly mortgage payments, giving you more breathing space and lowering your risk of defaults.

Some home owners may also choose to refinance so that they can convert their adjustable rate mortgages (ARM) to fixed rate mortgages. Other than locking in lower interest rates for the long term, a fixed mortgage rate also makes financial planning much easier - Click here to learn how to choose a mortgage type and term.

3. Refinancing Your Home to Pay Other Loans and Debts

Third major reason to refinance your home: Since mortgage loans are backed by real estate, their interest rates tend to be lower than other types of debts such as car loans or credit card bills.

With cash out refinancing, you can refinance your home to free up its equity and use the money to pay off your other debts. Effectively you will be replacing your costly consumer debt with cheaper mortgage loans.

For example: You have taken a car loan of $20,000 at an interest rate of 10% per year. You owe the credit card company $5,000 at an interest rate of 24% per year. In addition, you have also taken a business loan of $10,000 at 15% interest rate.

Let's see how much you will save by refinancing your home with a mortgage loan at 7% interest and using the cash freed to pay off the other debts (car loan, credit card bill and business loan):

Total Interest Per Year

Mortgage Interest Per Year

Savings Per Year

= Car Loan Interest + Card Interest + Business Loan Interest
= (20,000 x 10%) + (5,000 x 24%) + (10,000 x 15%)
= $4,700

= (20,000 + 5,000 + 10,000) x 7%
= $2,450

= $4,700 - $2,450
= $2,250

As with all reasons to refinance a property, remember you will have to consider the refinancing closing costs to see if it makes financial sense for you.

Financing Properties