1. To get a lower interest rate and lower payment: This is usually the main reason homeowners refinance their mortgage. When interest rates change, refinancing to a lower interest rate will lower your monthly payment and save you money in the long run.
2. Shorten the length of the loan: Refinancing can also be a way to finish paying your mortgage sooner. The way you do this is by refinancing to a loan with a shorter term, for example from a 30-year mortgage to a 20-year loan. You will face a higher monthly mortgage payment, but shorter mortgages usually have lower interest rates.
3. Get rid of or reduce PMI: You are required to pay mortgage insurance on your loan if you can’t make a down payment of 20% or more. A way to reduce or get rid of your PMI is by refinancing. Shortening your loan by a few years can also help you get rid of your PMI.
4. Switch from an ARM to a Fixed Rate: Refinancing can help you switch from an adjustable rate mortgage to a fixed rate mortgage. ARMs can be ideal for certain people’s financial situations, but interest rates fluctuate so much and can get very expensive. Switching to a fixed rate can save you money if you can lock in a solid rate.
5. Cash out refinancing: You can use cash out refinancing to put extra money in your hands by utilizing your home equity that has accumulated over the years. You can refinance for an amount higher than your current principal balance and take the excess funds as cash. People like to use this extra cash to remodel their homes, pay for their kids’ college, or even reinvest into another property.