You’ve had your mortgage for a few years and just heard about “refinancing your mortgage,” or maybe you’ve been in your current home for over a decade and are now exploring your future payment options. Either way, refinancing your mortgage can be a great option to boost long-term financial well-being.
What does it mean to refinance your mortgage?
Refinancing a mortgage means taking out a new mortgage to replace your original loan. I often suggest that my clients look at refinancing after they’ve had their mortgage for two to three years, then again on an annual basis. This is a great strategy because more often than not, it makes sense for people to refinance, but many would not know it without chatting with their mortgage lender.
Why would someone refinance a mortgage?
There are two common reasons someone will look into refinancing a mortgage: to shorten the length of time left on the mortgage and to get a better interest rate. Any reason for refinancing should be centered on your future goals, such as saving your children’s education or retiring early. Let’s break down each reason to refinance and explain how each could help you achieve your long-term goals.
1. Saving money
Refinancing can be a great way to reduce the length of your loan entirely. Many times it makes more sense to take on a shorter term because it will save you money in the long-term. For example, five fewer years of making payments on your mortgage loans would mean significant savings on monthly interest and principal payments. This could also mean you have option to retire early or can start saving for the next big adventure now.
2. Finding a better interest rate
For families or individuals looking to get a better interest rate on their mortgage and reduce monthly payments, refinancing is a great option. This will put more money in your pocket now to help you stay on top of your financial needs like taking care of your family and all of the child-related expenses or you’re taking a new step as a business owner. In the end, it’s still important to take into account how much interest you’ve already put toward your initial loan and how much you would then need to pay with the refinance. Loans are generally front-loaded with interest, meaning the longer you pay, the more each of your payments goes toward reducing the principal balance. You’ll want to ask your lender about the options for lowering your interest rate and whether the term will also decrease, remain the same, or increase.
Whatever your motivations for refinancing your mortgage, always consider your long-term goals and remember to contact your mortgage lender regularly to keep your refinance options top of mind.