Refinancing means getting a new mortgage to replace your current one. You might consider refinancing to:Discover the key steps to refinance your mortgage, lower your interest rate, and reduce monthly payments for better financial stability.

1. Cut costs:

If interest rates have gone down since you got your loan, refinancing could lower your monthly payment and reduce the total interest you pay over time.

2. Change the type of loan:

As your situation changes, your current mortgage no longer works for you. For example, if you have an adjustable-rate mortgage (ARM) and are worried about rates going up after the fixed period ends, you could refinance to a 30-year fixed mortgage. If you already have a 30-year fixed mortgage, you might refinance to a 15-year fixed mortgage, which would help you pay off the loan faster and pay less interest overall.

3. Cash out:

If you refinance and take out a loan that’s bigger than your original loan, you’ll get the difference as cash. You can use this money however you like. However, keep in mind that lenders may charge higher interest rates if they think you’re refinancing for this reason.

Should You Refinance Your Mortgage?

A simple guideline for deciding whether to refinance is the 2% rule. This rule suggests refinancing is worth considering only if you can get a new loan with an interest rate at least 2% lower than your current one.
While the 2% rule is helpful, it’s not a guaranteed answer. A more detailed approach is to figure out how long it will take for the monthly savings from the new loan (after taxes) to cover the costs of refinancing (which are usually similar to the closing costs of your original loan). To do this:

1. To calculate your monthly pretax savings, subtract your new monthly payment from your current monthly payment.

For example:

• Current payment: $699.21 (for a $100,000, 30-year fixed loan with a 7.5% APR)
• New payment: $599.55 (same loan with a 6% APR)

The monthly pretax savings would be:

$699.21 – $599.55 = $99.66

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