– You are able to lock in a lower interest rate
– The ability to shorten the term of your mortgage, saving interest
– You are looking to change your interest rate from adjustable-rate (ARM) to fixed-rate or vice versa
Refinancing is worth looking into if you can get an interest rate at least 1% lower than the original rate. This will allow you to obtain equity in your home quicker, as well as also decrease your monthly payment.
When interest rates fall, you can refinance your mortgage and get a comparable monthly payment to the one you have now, but cut the term significantly. Reducing your term means you’ll be able to save that much in interest! For example, if you have a 30-year, $100,000 mortgage with a fixed-rate of 8%, your monthly payment is $733.76. If you refinance to a fixed rate of 4%, you can cut the life of the loan in half and wind up having a monthly payment of $739.68.
While you likely chose an adjustable-rate mortgage (ARM) because of its lower rates initially, you are aware that in the future rates could increase to a point where you are paying a lot more than you would like to. Therefore, changing from an adjustable-rate to a fixed-rate loan will allow you to disregard future hikes in interest rates and keep a steady rate for the remainder of the loan.
If you’re noticing a substantial difference in adjustable-rate mortgages versus fixed-rates, and you’re planning on staying in your house for a short period of time, you can refinance to an ARM from your fixed-rate to greatly reduce your monthly payment. This can be particularly prudent if you don’t plan on residing in your house long enough to see interest rates eventually start to rise.
In closing, if you can obtain a lower interest rate, shorten your term, or reduce your monthly payment by switching your rate from adjustable to fixed or vice versa, refinancing your home is something worth considering.