You May Want to Refinance If...

Have your finances changed significantly since you applied for your mortgage? Whether you are struggling to make payments or have a greater income each month, you may want to consider refinancing your home loan. It doesn’t hurt to run the numbers to see if refinancing is right for you, especially if you fit into one of these scenarios.

1. You Can Reduce Your Interest Rate

One of the best reasons to refinance is to obtain a lower interest rate on your loan. This will not only help you save money by paying less interest overall, but speeds the process of building equity in your home. While it the traditional rule of thumb was that reducing your interest rate by at least 2 percentage points makes refinancing worth the cost and trouble, many experts now say 1 percentage point of savings is enough of an incentive to refinance.

Keep in mind that a good credit score is important to getting the best interest rates possible when you refinance. You can see two of your credit scores for free on Credit.com to see where you stand.

2. You Want to Shorten the Loan Term

With a lower interest rate, homeowners will often have the chance to refinance for a new loan with a shorter term. This can mean you can have your home paid off in as much as half the time of your previous loan. Just beware that it will likely increase your monthly mortgage payment.

3. You Need Lower Monthly Payments

On the other hand, if your income has dropped and you need to lower your monthly bills, refinancing can also help. Refinancing your mortgage can mean a drastically reduced monthly payment, freeing up hundreds of dollars a month for paying off other debts or saving for retirement. Although this will almost certainly lengthen the term of your loan, it might be the best option.

4. You Want to Convert an ARM Into a Fixed-Rate Mortgage

If you are unhappy with your loan terms, consider the refinance to switch from an adjustable-rate mortgage to a fixed-rate mortgage, or vice versa. Fixed-rate mortgages are great when interest rates are low and you don’t want to risk future hikes, while ARMs can be wise in a falling interest rate environment or if you do not plan to stay in your home for more than a few years.

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5. You Need to Tap the Home’s Equity

If you need to finance big expenses like starting a business, buying an investment or secondary property or covering a child’s education costs, refinancing your mortgage can help your home’s value act like a savings account. But be aware that this will reduce the equity you have in your home and lengthen the time it will take to own your home outright.

6. You Want to Consolidate Your Debt

Using your home equity to help pay off other, high-interest debts can help you save in the long run. Since the interest on your mortgage is tax-deductible and usually available at a lower rate than other “bad debt,” refinancing to consolidate your debts with a low-interest mortgage can help you pay them all at a more affordable pace for you. However, in some cases, you may be putting your home at risk to pay unsecured loans, so be sure you can make the payments before pursuing this option.

It’s important to carefully assess the costs and benefits of refinancing for your particular situation. With the right research and proper planning, refinancing (or deciding against it) can be a smart move for your family and your wallet.