Just like your car, sometimes your mortgage is due for a trade-in. You might find a new model with improved options that will save you money or fit better with changes in your lifestyle.
But, as with buying your next car, refinancing your mortgage is kind of a big deal. There are costs involved, and you can wind up with buyer's remorse if you make a wrong choice.
Here are 10 times when refinancing your home loan can be a good move.
1. If your credit score has improved
People with low credit scores are often given mortgages on less-than-ideal terms, if they're able to get a loan at all.
Let's say you took out your mortgage when your credit score was only fair — in the mid-600s — and now it's considered good or even very good (say, in the upper 700s). You might be able to get a better deal on your loan.
A 100-point improvement in your credit score could allow you to cut your mortgage rate by close to a full percentage point and save you tens of thousands of dollars in interest over the life of your loan.
2. If interest rates are falling
Interest rates fluctuate due to changing economic conditions, Federal Reserve decisions on monetary policy, and other factors.
While it's true that rates are generally moving higher now after being pushed to historic lows following the Great Recession, you might still find a better deal than your current mortgage rate. And that could mean substantial savings on interest costs.
Use this mortgage rate comparison tool to find your best available interest rate.
3. If you can shorten the loan term
If you'd like to get out from under your mortgage sooner, you could refinance to a loan with a shorter term. Maybe go from a 30-year mortgage to a 15- or 20-year option.
Shorter-term mortgages tend to come with lower interest rates, and the savings don't end there. You'll accrue less interest over the tighter time frame.
But you'll also face a higher monthly mortgage payment, maybe higher than you can afford. Calculate what your mortgage payment would be.
4. If you can lock in a fixed rate
With a fixed-rate mortgage, your interest rate never changes and your monthly payment stays level throughout the life of the loan.
That's different from an adjustable-rate mortgage, or ARM, which has an interest rate that can go up or down every year — pulling your payment amount up or down, too.
During a time of rising interest rates, an ARM can become a costly nuisance, making a refinance into a fixed-rate mortgage very appealing.
5. If switching to an ARM makes sense
A refinance can go the other way, too. When interest rates are trending lower, it can be smart for homeowners to dump their fixed-rate home loans — and exercise their right to take up ARMs.
Adjustable-rate mortgages hold steady for a certain number of years, and then their rates become variable. The loans tend to start out with lower rates than fixed-rate mortgages, and the rates can adjust downward during periods of falling rates.
But there's always a risk that an ARM rate will eventually go higher. So, you could find yourself looking to refi back into a fixed-rate loan at some point.
6. If you'd like to shake out some equity
If you've been making house payments for a while and have built up some equity in your home, you can do a refinance that will allow you to unlock some of that money and put it to work.
With a cash-out refinance, you pay off your existing mortgage and borrow a little extra, out of the equity. You might use the cash to improve your home — and make it even more valuable.
Money from a cash-out refi can have other uses, too. You might even open an investing account. But remember, it's loan money and you'll have to pay it back eventually.
7. If you can shake off pesky PMI
With conventional home loans, buyers who do not make a 20% down payment are typically saddled with private mortgage insurance, or PMI. It's an additional fee tacked onto your monthly mortgage payment that offers the lender some protection if you default.
Refinancing can be a way to ditch PMI.
A lender won't require you to carry it once you've got more than 20% equity in your home, and any increase in your home's value counts toward your equity. So, if home prices are rising where you live, a new lender may not see the need for PMI.
8. If you can get rid of secondary mortgages
If you've got a second mortgage — maybe a home equity line of credit you took out to pay for your new, tricked-out kitchen — a refinance can offer a great way to simplify your life.
You might be able to consolidate your housing debt into just one loan.
Second mortgages often have high interest rates, or variable rates with the ability to go higher. You could cut your current and future interest costs by refinancing into a single mortgage with a good rate.
9. If you want to buy out a co-owner
Let's say you're divorcing — and you're the one who'll get to keep the house. Or, your dad co-signed on your mortgage and has been helping with the payments, but now you've got a good job and want to release Pops from that obligation.
In these scenarios, you'd refinance to take your co-owner off the mortgage and the title. And in the process, you might get a new loan on better terms, such as with a lower interest rate.
But obviously, you will have to buy out the other person — in other words, let him or her walk away with half the equity that has accrued. Your co-owner helped with that, so it's only fair.
10. If it will let you consolidate other debt
If you're carrying credit card balances or have other loans at relatively high interest rates, you might do a cash-out refinance to use home equity to swap that debt for less expensive mortgage debt.
You'll wind up with interest that costs you less and may even be tax-deductible.
But be very careful. If you don't change the spending habits that got you into the other debt in the first place, you could find yourself struggling to make your mortgage payments — and put your house at risk.
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