Many homeowners refinance their mortgages to reap the various benefits involved. When you refinance a mortgage, you're essentially trading your old home loan for a fresh one with new terms. Most people refinance to take advantage of lower interest rates and reduce their monthly payments (though some folks end up raising their monthly payments, but for good reason). With that in mind, here's why you may want to think about refinancing right now.
1. Interest rates are going up
In mid-March, the Federal Reserve raised interest rates for the third time since late 2015, which means mortgage rates are about to start climbing across the board. If you've been toying with the idea of refinancing, you may want to lock in a better rate before it's too late. Now keep in mind that the latest hike only drove rates up 0.25%, so don't kick yourself if you didn't get in on time. On the other hand, since we don't know exactly how high rates will climb in the coming months, you'd be wise to get moving sooner rather than later.
2. You want to lock in a fixed rate
Many people start out with adjustable-rate mortgages, or ARMs, because they offer lower payments at first. The problem, however, is that once that initial period of lower payments ends, those who have ARMs run the risk of seeing their interest rates jump significantly. Given that rates have been climbing and we don't know what the future holds, now might be a good time to lock in some stability. If you refinance an ARM to a 15- or 30-year fixed mortgage, you'll get the benefit of predictable payments for the remainder of your loan.
3. Your salary has gone up significantly
The benefit of signing up for a 15-year loan, as opposed to a 30-year mortgage, is scoring a lower interest rate. Most homeowners, however, can't afford the larger monthly payments that come with a shorter borrowing period and, as such, opt for the 30-year time frame. But if your compensation has recently gone up significantly -- say, you've switched jobs or received a big promotion -- and you can afford a larger monthly payment, it might pay to trade in your 30-year loan for a 15-year loan with a lower interest rate.
Swapping a 30-year loan for a 15-year mortgage is an especially wise move if you're aiming to have your home paid off sooner, such as in time for retirement. Of course, you could achieve that same goal by making extra payments on your current mortgage, but if you get a 15-year loan, you'll typically reap the benefit of a lower interest rate. And because some lenders impose prepayment penalties, a 15-year-loan might be more beneficial if you're convinced you'll be able to swing the higher payments going forward.
4. You have more expenses -- and less cash -- than before
Perhaps you've added more children to your household, or have a partner who's no longer earning an income. Whatever your circumstances, if you're suddenly struggling to keep up with your mortgage payments, and you have a 15-year loan, trading it in for a 30-year mortgage could help from a cash flow perspective (not to mention, lower your foreclosure risk). Now the downside of moving from a 15-year mortgage to a 30-year is that you'll end up spending more money in interest over time – but that's a far better alternative than compromising your immediate financial security just to make your housing payments.
Some final thoughts
Refinancing a mortgage usually isn't free. Because there are closing costs involved, you'll need to make sure you'll be staying in your home long enough to break even or, ideally, come out ahead. If, for example, you incur $3,000 in closing costs but shave $200 off your monthly payments, it will take you a full 15 months to break even. Furthermore, if you're not looking to change the term, or length, of your loan, it generally doesn't pay to refinance unless doing so shaves a full percentage point (or more) off your current rate.
Refinancing your mortgage is a move that could pay off in the long run. Just make sure what you ultimately stand to gain is worth the up-front cost and hassle.
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