When it makes sense to refinance

When you took out a mortgage on your home, chances are you choose the best option for your needs at the time. But because personal and financial situations change, as do housing markets and interest rates, the best mortgage for you today is not always the same one you currently own. That’s when it may be time to refinance.

Even though refinancing isn’t cost-free, it can be a smart move for a wide range of reasons. Probably the most common motivator is to lower your mortgage interest rate. If currently available rates are 1 percent or more below your existing APY, refinancing may be worth the cost to lower the amount of interest you pay and therefore your monthly payments.

Others will refinance to change the length of their term, either shortening it, for example, to be debt-free by retirement, or lengthening it in tandem with lowering their rate because they want or need to minimize their payments.

Another attractive reason to refinance is if you hold an adjustable-rate mortgage (ARM) and either decide you’ll be in the house long enough to make a fixed-rate mortgage pay off, or see that your ARM is now charging more than currently available fixed-rate mortgages.

But there’s still another frequent reason for refinancing, and that’s to turn home equity into cash for other purposes. If you refinance to a loan amount that’s higher than your current mortgage balance, you’ll receive the difference in a payout. Many homeowners take advantage of this opportunity when they need to fund a large purchase or a home renovation project. Others will do a cash-out refinance to consolidate debt, such as paying off high-interest credit card balances.

In any case, refinancing involves costs and potential risks, so it’s important to weigh these carefully against your calculated benefits.