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Key takeaway
Refinancing your mortgage may have 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 the refinancing, as well as the new interest rate of your loan, to determine if a refinance might make sense.
Depending on when you purchase your home, you may notice that interest rates go up or go down in the months or years after you secure your mortgage. Additionally, you may find that your credit score changes — perhaps it goes up based on smart financial decisions you’ve made around your debt.
If rates are lower, or you think your credit rating may qualify you for a better interest rate than you received when you first got your mortgage, you may consider refinancing. A refinance is essentially getting a new mortgage to replace the one you currently have. Read on for information on when refinancing your mortgage may benefit you.
Why refinancing your loan could make sense
1. To get a lower interest rate
When you’re making mortgage payments, you’re paying against the principal and the interest your lender charges on the loan. The lower your interest rate is, the less you’ll pay in interest over time. This can mean you pay more of the principal loan amount each month to pay off your mortgage more quickly, or that you free up more of your monthly budget for other day-to-day expenses or for saving for future goals.
Taking advantage of a lower interest rate is the #1 reason homeowners refinance their mortgage, according to the U.S. Census Bureau.
2. To reduce the time frame of your mortgage
You may be able to refinance to reduce the amount of time it will take to pay off your mortgage. For example, if you had 22 years left 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, however. Shortening the length of your mortgage may make your monthly payment higher, depending on the interest rate and other factors.
3. To switch from an adjustable rate to a fixed rate
If you have an adjustable-rate mortgage (ARM), the interest rate can go up or down over time based on market conditions. If you have an ARM and you expect interest rates to go up, you may consider refinancing to lock in a fixed rate, especially if rates are low.
4. To eliminate mortgage insurance
If you made a down payment of less than 20% of the purchase price initially, or your loan required private mortgage insurance for another reason, certain steps may help you eliminate your PMI.
If you can show that your home has increased in value, or you have paid down your loan balance enough, you may be able to request that your lender remove the PMI from your loan. Typically, you will need to have 20% equity (the difference between the market value of your home and what you owe on your mortgage) in your home. Depending on what type of property your home is, 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).
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This strategy may help reduce the amount of interest you pay over time. But it’s important to consider your full financial picture.
If you have financial challenges after you become a homeowner, your mortgage lender may be able to find options that can help you.
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If you are a service member on active duty, an eligible spouse, partner, or dependent, or currently receiving SCRA benefits, please consult with your legal advisor prior to seeking a refinance of your existing mortgage loan. In some cases, a refinance may impact your eligibility for benefits under the Servicemembers Civil Relief Act or applicable state law.
Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A.
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