Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many ꦉreasons why homeowners refinance:

• To obtain a lower interest rate and smaller monthly payments
• To shorten the term of their mortgage
• To convert from an adjustable-rate mortgage (ARM) to a 澳洲幸运5官方开奖结果体彩网:fixed-rate mortgage, or vice versa
• To tap into home equity to raise money for a large purchase, to consolidate debt, or to deal with a financial emergency,

Since refinancing can cost 澳洲幸运5官方开奖结果体彩网:between 5% and 7% of a loan's 澳洲幸运5官方开奖结果体彩网:principal and—as with🐼 an original mortgage—requires an appraisal, a title search, and application fees, it's important to kn♏ow when it's worthwhile and when it's better to wait.

When Should You Refinance?

Refinancing your mortgage is a big step. As such, there are several things you should consider before you sign the paperwork. Most borrowers consider 澳洲幸运5官方开奖结果体彩网:mortgage rates they want to 💛refinance. Locking in a lower rate is an important factor to consider when you want to refinance because it effectively lowers your payments. But it shouldn't be the only thing to focus on when you want to renew your mortgage.

Here are a few𓃲 other factors to consider before you apply:♏

• Your 澳洲幸运5官方开奖结果体彩网:home equity. Make sure you have equity available in your home. This is key if the value of your home drops below the value when you purchased it. It's also important to note that many lenders (especially conventional lenders) won't refinance your mortgage if you don't have enough equity in your home.
• Your credit history. You won't qualify for a refinance if your 澳洲幸运5官方开奖结果体彩网:credit score doesn't meet the minimum requirements. Take the time to build up your credit score before you apply.
• Refinancing costs. If you have a mortgage, you'll know how much you paid in additional costs. As such, you'll have to pay these expenses again—usually a small percentage of the loan. Try to find ways to negotiate so you can reduce the costs.

Other points you'll want to note are your 澳洲幸运5官方开奖结果体彩网:debt-to-income (DTI) ratio, the overall term of the refinance, and whether you qualify for refinance points t🍌o ♎reduce the interest rate on the loan.

Refinancing for a Lower Interest Rate

One of the best and most common reasons to refinance is to lower your loan's interest rate. Historically, the rule of thumb has been that refinancing is a good idea if you can reduce you🧜r interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance. Using a mortgage calculator can help you see how much you might save. 

A lower interest rate will save you on short- and long-🅠term interest while reducing your monthly payments. For example, a $100,000, 30-year fixed-rate mortgage with an interest rate of 7% has a principal and interest payment of $665. That same loan at 5% reduces your payment 🦹to $536.

Refinancing to Shorten the Loan's Term

When 澳洲幸运5官方开奖结果体彩网:interest rates fall, hom🤡eowners sometimes have the opportunity to refinance an existing loan for another loan that, without much🌊 change in the monthly payment, has a significantly shorter term and can save them a considerable amount of interest over time.

For example, suppose you purchased a $200,000 home with 20% ($40,000) down and a 30-year fixed-rate mortgage for $160,000 at 8%. Using 澳洲幸运5官方开奖结果体彩网:Investopedia's mortgage calculator, which also builds in some assumptions about property taxes and insurance, your monthly payments would be about $1,419, and over the course of the loan, you'd pay $262,648 in interest, making your total repayme🦋nt $422,648.

If interest rates dropped, and you could get a 15-year fixed-rate mortgage at 6%, your monthly payments would rise to about $1,594. While that's $175 more than your current mortgage, you'd now own your home free and clear in 15 years. Plus, your total interest payments would be just $83,030.

Note that this simplified example doesn't account for the fact that whatever payments you had already made on your 30-year mortgage would have reduced the outstanding balance of your loan to some degree, so when you took out the 15-year mortgage, you wouldn't need to borrow the full $160,000. In other words, your savings could be even greater.

Ref🐟inancing to Convert to an ARM or a Fixed-Rate Mortgage

While adjustable-rate mortgages (ARMs) often start with lower rates than fixed-rate mortgages, periodic adjustments can lead to rates as high as those available on new fi⭕xed-rate mortgages. Refinancing to a fixed-rate mortgage is a way to avoid future interest rate hikes.

Conversely, converting from a fixed-rate loan to a new ARM with a lower monthly payment can sometimes make sense, especially for homeowners who do not plan to stay in their homes for over a few years. Depending on the ARM, it may not adjust for the first five, seven, or even 10 years, making it essentially a fixed-rate loan for that period.

Refinancing to Tap Equity or Consolidate Debt

Homeowners can also refinance as a way of tapping some of the equity that has built up in their homes over the years through what is known as a cash-out refinancing.

In cash-out refinancing, the homeowner takes out a mortgage larger than they currently owe, pays off the old mortgage, and pockets the remainder in cash. The cash can be used for any purpose, such as home remodeling, a child's college education, or to 澳洲幸运5官方开奖结果体彩网:consolidate and pay off their other, hi✃gher-interest debts, suc💝h as credit cards.

The downside is that the cash comes at a cost, and the homeowner could be paying interest on it for many years. So, these loans aren't to be entered into lightly. In particular, homeowners may want to be judicious in how much cash they take out. For example, if a homeowner can cash out $100,000 by refinancing but only needs $25,000, there's no sense in borrowing (and paying interest on) the other $75,000.

The Bottom Line

Refinancing can be a smart financial move if it reduces your mortgage payment, shortens the term of your loan, or provides cash for necessary expenses. However, it can also involve significant closing costs and fees, so you may not realize savings for several years. Before you refinance, it's worth considering how long you plan to stay in your home and comparing your options using a mortgage calculator.