Refinancing your home loan refers to taking out a new home loan in order to pay off your existing home loan. Often, choosing to refinance allows you to save money or benefit from the equity you have built in your home.

When to Refinance

Changing Interest Rate – Refinancing makes sense when it helps your financial situation. For some, refinancing allows them to get a new home loan at a lower interest rate. Typically, if the interest rate is a full percentage point or more lower than the existing one, the financial benefits outweigh the refinancing cost. Sometimes homeowners who originally purchased a home with an adjustable rate mortgage choose to refinance to a fixed rate loan. While this temporarily increases the interest rate, it stops the potential for further rate increases later in the life of the loan.

Removing PMI – Others choose to refinance to remove private mortgage insurance. Once the value of the home has increased enough that the home’s equity is equal to 20 percent of the mortgage’s remaining value, homeowners can remove PMI by refinancing, thus saving money each month on their monthly statement.

Cash Out Refinancing – Sometimes, refinancing gives the homeowner the chance to cash out some of the equity in the property. In this type of refinance, the new loan is higher than the current principal balance, and the difference is taken out as cash. This money may be used to pay down other debts or make home improvements.

Changing the Term – Shortening the term on the loan is another reason to refinance. While this may increase the monthly payment amount, it decreases the total interest paid over the life of the home loan.

Refinance Considerations

Before refinancing, make sure the benefits outweigh the costs. When you refinance your loan, you will pay closing costs and fees as you did when you purchased your home. These can be rolled into the loan amount, but you need to make sure you will benefit financially from the cost savings after paying these fees. For many, refinancing represents a solid way to lower their mortgage costs while benefiting from the equity in their homes.