Compare Loan Rates
Everyone has their own reason for refinancing, but usually to save money or take cash out.
Reduce the Monthly Payment
Instead of looking at the difference in the refinance rate, compare the savings between your existing monthly payment and the home refinance payment. Use only the principle and interest payments on a loan amount that includes the closing costs, but does not include taxes, insurance, or cash out. Then decide if the monthly savings will make it worth your while.
Consolidate Credit Card Balances
If you are carrying a substantial balance on credit cards, you may have a good chance of saving money with a home refinance. Consolidating high rate, compound interest debts with a low rate mortgage may reduce your total monthly payments, and convert your debt into a tax deductable, simple interest loan.
Pay for Personal Expenses
A home refinance with cash out can provide money for personal expenses. As long as you have sufficient equity in your home, refinancing could be one of the cheapest ways to access funds at a low rate. You may have medical expenses, a college bound teenager, or maybe a need for home improvements, or perhaps you would just like to take your family on nice vacation.
Change from Adjustable to Fixed Rate
Adjustable rate loans can serve their purpose, which is usually for the short term, but eventually interest rates go up, and your monthly payments inrease accordingly. If you plan to keep your home for a long period of time, refinancing to a fixed rate can provide stable, long term savings.
Reduce the Term of the Loan
A home refinance with a shorter term can reduce the amount of interest you pay over the life of the loan. There is about $120,000 difference in interest charges between a 15 year mortgage and a 30 year mortgage, on a $200,000 loan. You can build equity in your home much sooner with a shorter term, and plan ahead for retirement by setting a goal to eventually pay off your mortgage.
Eliminate Mortgage Insurance
Provided you have enough equity, a home refinance can save money by eliminating unnecessary insurance. If you paid less than 20% down payment when you bought your home, you may still be paying mortgage insurance. The insurance is only for the benefit of the lender, and is included in the monthly payment until you sell your home, or refinance at 80% loan to value, or less.