Should You Refinance Your Mortgage?

As interest rates change, you may be able to refinance at a lower rate than you have with your current mortgage. This could decrease the amount you pay each month, reduce the total amount of interest you pay over the life of the loan, or both. Keep in mind, your exact interest rate will be based on multiple factors, including market conditions and your credit score.

Equity — which is the difference between what your home is currently worth and the amount you still owe on your home loan — determines the profit you can make when you sell your home. You may be able to build equity faster by refinancing with a shorter-term loan — changing from 30 years to 15 years, for example. Although your monthly payments may increase in this scenario, the total amount you’ll pay over time will typically be lower because you’ll be paying less interest overall.

If your current loan is an adjustable-rate mortgage (ARM), refinancing to a fixed-rate mortgage may offer more financial stability by making your monthly payments more predictable. For an ARM, the required monthly payment amount can change over time, which may cause financial difficulties. Refinancing can lock in a regular monthly payment.

Refinancing your mortgage may be a cost-effective way to pay for home renovations. Special refinancing options combine the cost of both the home itself and any new renovations into a single mortgage with a single monthly payment. This simplified financing makes it easier to upgrade your home and may even increase its value.

You can take advantage of the equity you already have in your home with a cash-out refinance, which provides cash for renovations, reducing other debt, or other purposes. The cash you receive is added to the total balance of your new mortgage loan. A cash-out refinance is likely to reduce the amount of equity in your home, extend the time it takes to pay off your mortgage, and require you to pay more total interest — so consider carefully before pursuing this option.