Refinancing is the act of taking out a new mortgage to replace your current mortgage. During this process your current mortgage will be paid in full and you will acquire a new mortgage with new terms. Refinancing is all about saving money. Reasons to refinance include lowering your monthly payment, paying off your mortgage faster or pulling equity out of your home for any purpose.
Reasons to refinance:
Lower your monthly payment - If you refinance your current mortgage into a lower interest rate mortgage, you will reduce your monthly mortgage payment each month for the rest of your loan term. This can add up to thousands of dollars of savings over the life of a mortgage. You can also reduce your monthly payment if your new mortgage offers lower mortgage insurance or no mortgage insurance.
Get out of an Adjustable Rate - If your current interest rate will adjust at some point and you want to reduce your risk, now is a great time to refinance into a rate that will be fixed for a longer period of time. Rates are still at historic lows but they will not stay there forever. If you are going to stay in the home for a few more years, why not guarantee yourself a low fixed rate now so you don't have to stay awake at night worrying about it.
Pay your mortgage off faster - If you refinance your current mortgage into a shorter term mortgage such as a 20, 15 or 10-year term you will pay the mortgage off faster by reducing the amount of years you have to pay and saving you thousands of dollars of interest. Shorter term mortgages usually also have lower rates and lower or no mortgage insurance.
Consolidate your debt - If you have extra debt you would like help with, you can use the equity in your home to consolidate several debts into one low monthly payment. A debt consolidation mortgage is a loan that pays off your current first mortgage and any other liens you have on your home and then allows you to pull equity out of your home to also pay off other debts such as credit cards, student loans, car loans, personal loans, etc. Your debts will be paid off and everything will be combined into one low rate payment. Since this is a first mortgage, the interest may be tax deductible as well! Consult your tax professional for particulars.
Take cash out for any reason - Your home is your asset. If you have equity in your home, you can borrower against that equity for any reason. If you are in need of cash, a cash-out refinance mortgage may be a great, low rate option, plus the interest may be tax deductible.