A home loan or mortgage is often used to pay for the majority of the purchase price of a new home. Mortgages are typically paid back over long periods of time, such as 15 or 30 years, which allows a large amount of interest to accrue on the money owed. Refinancing a mortgage is a way to reduce the cost of a loan by altering the terms of the loan.

Lower Interest Rates

The purpose of refinancing a loan is to save money by paying less interest on the loan. When you refinance, you are basically offering up your debt burden for any lender to buy out and offer you a new loan with a better rate. The best time to refinance a mortgage is when interest rates have fallen to levels significantly below the rate on your current loan, which makes lenders willing to buy up debt and offer lower interest rates. The main drawback of refinancing is that the process can involve various finance charges, fees and closing costs that can offset some of the money that will be saved in interest. It is, therefore, in the best interest of the borrower to refinance infrequently to avoid paying such costs too often. If you stand to save several thousand dollars by refinancing at a given interest rate over the life of your mortgage, it is probably worth refinancing.

Changing Terms

Another potential reason to refinance a mortgage is to change certain terms of the mortgage. For instance, if your home loan is set to a variable interest rate and the current interest rates are very low, you might benefit from refinancing to avoid potential interest rate increases in the future. The danger with refinancing for this reason is that if interest rates do not increase much over the life of the mortgage, you might end up wasting more money on the costs of refinancing than you save in interest. In general, fixed interest rates are preferable to variable rates because they are predictable and immune to increases in inflation.

Extending Mortgages

Refinancing a mortgage can also be a way to extend the duration of the loan in order to reduce the size of monthly payments. If your loan payments are becoming too burdensome because of a buildup of other expenses, refinancing a loan to a longer term can lower monthly payments. The drawback of refinancing for this reason is that extending the loan's length will typically increase the overall amount of interest that will be paid. Considering that missing mortgage payments can damage credit and potentially lead to foreclosure, extending a mortgage can be useful in the right situation.

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When to refinance home mortgages

Refinancing information