Lower interest rates often prompt homeowners to refinance their mortgages — but is it a smart financial move for you? It’s true that refinancing to a lower rate could save you money in interest payments and could even make it easier to pay off your mortgage in the long run. However, a more attractive rate isn’t the only reason to refinance. Here are some scenarios where mortgage refinancing can work in your favor:
You can lower rate by at least 1%
If refinancing means you can lower your rate by at least 1%, you could end up saving money on interest.
Even a quarter percent reduction can save you money.
You have at least 20% equity in the home
When you’ve built up equity in your home and rates are dropping, refinancing may help you lower your monthly mortgage payment.
But remember…refinancing with 20% or less equity in your home means you’ll still have to pay private mortgage insurance, which can offset any interest savings.
Your home increased in value
When the value of your home goes up, you may qualify for a cash-out refinance for the difference in the value of your home vs. what you owe.
You plan to stay in your home for at least 5 years
If you plan on building more equity in your home and selling later, refinancing may help you save money.
You currently have an adjustable rate mortgage (ARM)
If you see interest rates are going up and you signed off on an ARM, refinancing to a fixed-rate mortgage at a lower rate may help reduce your interest payments.
If you secured an ARM seven or more years ago, you may save money by refinancing at today’s rates.
You’re looking for a shorter loan term
If you want to own your home outright within the next 10 to 15 years, refinancing to change the terms of your loan may help you reach your goals.