smiling father holds toddler son at kitchen table and reads Gate City Bank’s article on reasons for a mortgage refinance while mom washes dishes

7 Reasons a Mortgage Refinance May Be in Your Best Interest

If you’re interested in swapping your current home loan for one with a lower rate, different amount or better terms, a mortgage refinance may be the right option. Keep reading to learn seven common reasons to refinance a home loan.

A mortgage is a wonderful thing. It’s the key to accessing money you don’t have yet – so you can grab the keys to your dream home. But as time goes on and life changes, you may find yourself wondering if it’s in your best interest to refinance, especially if it means saving money in the long run. It’s a healthy question to ask! Join us as we explore the top seven reasons to refinance your mortgage:

  • Snagging a lower interest rate (and lower payments)

    At some point after securing your home’s mortgage – months or years down the line – you may find yourself in an economic landscape where lower interest rates are abundant. If you’re paying 6.5% and suddenly rates become available at 4%, it’s only natural to want to refinance. After all, your rate impacts what your monthly payments are, and lower payments save money.

    But first things first: While a lower interest rate may seem like a rock-solid indicator of savings, it’s important to note the closing costs that come with refinancing your home, usually to the tune of 2-5% of your home’s loan amount. Therefore, you’ll want to make sure that the long-term benefits actually outweigh these costs. Here are some common closing costs that come with a mortgage refinance:

    • Loan origination fee
    • Application fee
    • Appraisal fee
    • Title insurance

    You’ll also have to meet certain lender requirements, such as a loan-to-value (LTV) ratio, debt-to-income (DTI) ratio and a good credit score. If you’ve paid off a significant chunk of your mortgage, or if your home’s value has increased, your LTV will probably be smaller and you’ll have built more equity, so a lender will likely see your refinance request as less risky, which can help you score a better rate.

    Remember: By lowering your mortgage interest rate, you’ll build equity more quickly because more of your money will go toward your principal balance. In other words, you won’t be paying as much in interest.

  • Giving credit where credit is due

    If you improve your credit score after securing your home mortgage, you may be able to refinance at a lower interest rate – and save thousands of dollars over the lifetime of your loan. Monitor your credit score for free using one of the three major credit reporting agencies: Equifax, Experian and TransUnion.

    By paying bills on time, working down debt and not opening new lines of credit, your chances of improving your credit score will increase – and so will your chances of refinancing your mortgage at a lower interest rate.

  • Consolidating debt

    Another reason to refinance your mortgage could be to consolidate your debt into a single, more affordable and more convenient payment. This is an especially useful option if you have other high-interest loans or credit card debt. In addition to reducing monthly payments, you could save on interest.

Pro Tip:

Interested in consolidating your student loans with no fees and a low interest rate – and having more money to afford your dream home? Check out our BetterLife™ Student Loan program!

  1. Accessing equity

    By doing a cash-out refinance, your current mortgage would be replaced with a higher loan amount, allowing you to use the equity you’ve built in your home to borrow money. You could use these funds to improve your home, making renovations or repairs that increase your property’s value. The money could also be used for other purposes, such as paying toward education, health care or credit cards.

    Real-life example: If your home is worth $200,000 and you have $100,000 left on your current mortgage, you’d essentially have $100,000 in equity to borrow against. In this scenario, you could opt to do a cash-out refinance for $40,000 of your equity, and your new mortgage would be for $140,000. In short, equity equals out to your home’s current value minus how much you still owe your lender.

    Lenders typically consider a cash-out refinance as having more risk, so there’s usually a higher interest rate. And to be eligible, lenders typically require that your LTV be at or below 80%. Ultimately, having a strong credit score will work in your favor! If you’re considering this type of mortgage refinance, easily calculate the equity in your home with our helpful calculator.

  2. Adjusting your loan’s term

    Deciding to shorten your loan’s term – for example, from a 30-year mortgage to a 15-year mortgage – is another potential reason to refinance your mortgage. For one, a shorter term usually comes with a better interest rate. Your monthly payment will probably go up, but you’ll pay off your home faster!

    Alternatively, you can lengthen your loan’s term for lower monthly payments. An example of when you might consider doing this is if you anticipate having a lower income and you want to pay off your loan more gradually over time. The downside, however, is you’ll pay interest for a longer period of time.

  3. Switching between an adjustable rate and fixed rate

    When you set up your original home loan, you might have secured an adjustable-rate mortgage (ARM). While this option initially saves you money on your monthly mortgage payment, once the fixed period is up, the interest rate could spike. By refinancing your loan and switching to a fixed-rate mortgage (FRM), specifically one at a lower rate than where you’re currently at, you’ll be protected from future increases.

    On the other hand, if you’re not looking for a long-term financing option, such as if you know you’ll be selling your home within the next few years, switching to an ARM might make more sense. This is because you’ll have a better chance of paying a lower rate in the time leading up to selling your home.

  4. Buying out an ex-partner

    If your home is co-owned by an ex-spouse, business partner, friend or someone else, there may come a time when you want to refinance the loan to remove them from it. However, the second party may still have to sign an acknowledgment during the refinance process.

Considering a Mortgage Refinance? Let’s Run the Numbers.

If you’re thinking about refinancing your mortgage, a good next step is to meet with a helpful lender. As the #1 mortgage lender in North Dakota, Gate City Bank specializes in making the refinance process easy. We’ll help guide your next steps in finding the right option for you. And if you’re still wrestling with whether or not to refinance, simply try out our helpful calculator as a small first step:

Time to Refinance?

The decision to refinance a home mortgage can involve many factors. You might want to take cash out of your home at when you refinance to use for other purposes. But the most common purpose is to obtain a lower interest rate and lower monthly payments. In the latter case, the decision to refinance should be based on lowering the overall mortgage costs and breaking even on the refinance in a reasonable period of time.

Related to This Article

happy group of young people spend time together after improving their credit scores

7 Ways to Improve Your Credit Score

Want to boost your credit score to experience better interest rates and a stronger financial future? Check out our seven helpful tips!

Curly-haired woman in sage sweater circles the closing date for her new home on a whiteboard calendar

Countdown to Closing: 7 Ways for Homebuyers to Stay on Track

Wondering how long it takes to close on a house? Here’s what to expect, along with seven tips to keep your closing date on track!

joyful young couple leans against table and looks at phone in kitchen of their new home

6 Ways to Save for a Home Down Payment

You’ve been looking for the right home, carefully researching and vetting each listing. But are you prepared for the down payment? We’ve got you covered with six helpful tips!