Refinancing refers to replacing your original mortgage with a new mortgage option by taking out a new loan—typically one with more favorable terms and interest rates. Depending on your goals, refinancing your mortgage can often be financially beneficial—however, not every refinance makes sense. To determine if refinancing your mortgage is the best option for you, consider these viable reasons to refinance your home.
Your credit score has improved
One of the most worthwhile reasons to refinance your home is to get a mortgage with a lower interest rate. Doing so will help you save a considerable amount of money in interest payments over time. If your credit score has significantly improved since you applied for your original mortgage, you may be able to refinance you home to get a lower interest rate. Often, people with higher credit scores will be eligible for mortgages with more favorable terms—such as lower interest rates. As such, people who have greatly improved their credit scores have a viable reason to refinance their homes.
Interest rates have dropped
Interests rates tend to fluctuate over time. Taking advantage of lower interest rates is a viable reason to refinance your home because you can significantly reduce the amount of money you pay for interest over time. As a general rule of thumb, refinancing your mortgage is worth considering when interest rates drop by 0.5 percent to 2 percent.
You can pay off your loan faster
Refinancing your loan to a shorter-term option will allow you to pay it off faster. If you’re able to manage the larger monthly payments, switching to a shorter-term loan option has many benefits. In addition to decreasing the amount of time you spend paying off your loan, shorter-term loan options also typically require lower interest payments. As such, refinancing to a shorter mortgage can significantly decrease the amount of money you’ll pay during the life of your loan.