Refinancing is most often motivated by lower interest rates, which can bring the dual benefit of lower mortgage payments and lower interest costs over time. But there are many other legitimate motivations. There is no “one-size-fits-all” solution, but here are a few reasons why you might want to consider a refinance.

Lower Payments

When rates fall, it’s always tempting to refinance. A common rule of thumb is that a 1% drop in rates will make it worthwhile. But as just mentioned this is only a number to use as a reference. For a homeowner with a $200,000 balance, a rate reduction of even one percent can lower the monthly payments by a couple hundred dollars and cut long-term interest expenses by hundreds of thousands.  That’s a HUGE savings!

A Quicker Payoff

This is often a worth-while goal if you can manage the somewhat higher payments. Replace a 30-year-term with 15 years you’ll be out of debt sooner. Choose the ease of a 30-year term and the payments will go down a lot less than you’d expect.

Lower Interest Costs

Locking in a better fixed rate is great, but it is not the only way to lower interest bills. Adjustable Rate Mortgages generally offer lower rates in the early years followed by higher rates later. If you plan (or are sure) to be in the house for less than five years, an ARM may make a lot of sense.

Cash out

Borrowers may use their home’s equity to pay off debt or to make home improvements.  Keep in mind that most lenders max the loan to value ratio to no more than 80%.  Cash out refinances also tend to have slightly higher rates given the additional risk factors to the lender.  

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