Benefits of refinancing your mortgage

Refinancing your mortgage has several potential benefits: it could reduce your monthly principal and interest payment, or it could help you pay off your mortgage faster. You'll want to review any costs associated with refinancing, as well as the new interest rate of your loan to determine if a refinance might make sense for you.

One way to determine if refinancing is right for you is to know your breakeven point, which is when the total upfront cost of your refinance is equal to or lower than your total projected savings over the life of your new loan.

If rates have dropped since you opened your current mortgage loan, you can refinance to a lower rate. This can help free more of your monthly budget for other day-to-day expenses or for saving for future goals.

You may be able to refinance to reduce the amount of time to pay off your mortgage. For example, if you have 22 years remaining on your initial loan, you may be able to refinance by choosing a 15-year or 20-year mortgage. It’s important to review the impact this may have on your monthly principal and interest payment because shortening the length of your mortgage may make your monthly payment higher, depending on the interest rate and other factors.

If you have an adjustable-rate mortgage (ARM), after the initial period, the interest rate on your loan can rise or fall over time based on market conditions. You may consider refinancing your ARM loan with a fixed-rate mortgage to avoid having a higher monthly mortgage payment.

Mortgage insurance, also known as private mortgage insurance (PMI), allows you to obtain a mortgage with a smaller down payment. It’s designed to protect your mortgage lender if you stop making payments on the mortgage as agreed. PMI is required on certain types of loans, including on conventional mortgages when your down payment is less than 20% of the home’s appraised value or sales price—whichever is lower.

However, you may be able to eliminate your mortgage insurance if you refinance. With a mortgage refinance, you essentially apply for a new loan to replace your existing loan. Depending on your loan type, the amount remaining on your mortgage, and your home’s value, refinancing your mortgage may help you obtain a new loan without requiring PMI.

Typically, you will need to have at least 20% equity (the difference between the appraised value of your home and what you owe on your mortgage) in your home to avoid paying PMI. Depending on the type of property, lenders may be required to end your PMI obligation after a certain amount of time. Other factors to remove PMI include having a good payment history, the currency of the loan, and depending upon the investor, an automated valuation model (AVM). Talk to a mortgage consultant to discuss your options.