3 Reasons to Refinance Your Mortgage

3 reasons to refinance your mortgage now

The reasons that homeowners refinance their mortgages vary as much as any financial decision that individuals make. All reasons relate directly to a financial reason of some sort, but the specific reasons usually fall into one of three basic categories:

1. Need to convert an ARM to a fixed rate mortgage before it resets upward
2. Need to lower monthly payments to stretch household budget
3. Need home equity to make another purchase or cover another expense

ARM to fixed rate mortgage

If you have an adjustable-rate mortgage (ARM) that's getting ready to adjust upward, it may be time for you to refinance into a fixed-rate mortgage. One of the main advantages of a fixed-rate mortgage is that once you lock in your rate you know what your monthly mortgage payment is going to be each month. You can use a mortgage payment calculator to compare the difference in your monthly payments between fixed-rate and adjustable-rate mortgages.

You may also want to consider refinancing if you're nearing the end of the first phase of an interest only mortgage and your payment is about to kick up. A refinance will spread those payments over a longer term and reduce the impact to your budget.

Lower monthly payment

Another good reason to refinance your mortgage is to lower your interest rate. In turn, the lower interest rate tends to decrease your monthly mortgage payment. The longer the term, or number of years of the mortgage, the lower your monthly payments will go. You can use a refinance calculator to help you compare your current mortgage situation with a new refinanced mortgage.

Home equity and tax advantages

A third primary reason for refinancing a mortgage is to borrow cash against the equity you've built up in the home to make another purchase. You can accomplish this with a straight cash-out refinance or by refinancing the first mortgage while simultaneously adding a second mortgage or line of credit.

Typically, homeowners go this route to get a tax deduction from a non-tax-deductible purchase. For example, if you take out an auto loan to buy a new car, the interest is probably not tax-deductible. But if you use the money from a cash-out refi to buy the car, now you're paying interest on a home equity loan which means you can typically deduct 100 percent of the interest you pay.

Mortgage comparison calculator

A mortgage loan comparison calculator allows you to compare types of mortgages to see which way of structuring the refinance will help you accomplish your reason for refinancing in the first place.

For example, if you have a low interest rate on your first mortgage, say 4.5 percent, it may cost you more in interest payments in the long run to refinance into a new mortgage at 5 percent even if you are able to take some cash out to cover home repairs or to make another purchase. On the other hand, if you have a 7.5-percent interest rate on your first mortgage and the current rates run at 5 percent, it may be a good move to do a cash-out refinance for the full amount instead of adding a second mortgage, which typically has a higher rate of interest.