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The best times to refinance your mortgage

Even with a rise in mortgage interest rates, many homeowners in the United States would still benefit from refinancing their loans. Getty Images/iStockphoto

For homeowners looking to cut corners and save money, a refinance is often one of their most attractive options.

By simply taking out a new loan to replace the existing mortgage you can, in theory, get a lower interest rate, thus lowering your monthly payment. You may also be able to condense your loan into a shorter term than you initially agreed to, allowing you to pay off your loan faster. This saves you significant sums of interest you otherwise would have paid.

Even with a rise in mortgage interest rates, many homeowners in the U.S. would still benefit from refinancing their loans. If you think you could be one of them, then start by exploring your refinance options here to see what rate you're eligible for.

Not sure if you would benefit from a mortgage refinance? Read on to see if you fall into one or more of the following categories.

The best times to refinance your mortgage

Here are three of the best times to refinance your mortgage. 

When you can lower your interest rate

This may seem obvious but some homeowners overlook the benefits of refinancing when they see that they can only get a new rate that's a half or full point lower than what they currently have. But do the math (the calculator below can help). Even a rate that's just a point lower can potentially save you thousands of dollars over the life of the mortgage, depending on how many years you have left. 

A lower interest rate has multiple benefits. Besides saving money it also boosts the amount of equity you have in your home (because you're paying less toward interest and more toward the mortgage principal). And the savings come twice: over the duration of the loan and immediately in your lower monthly payment.

You can easily discover what interest rate you qualify for here.

When you can shorten the loan term

Mortgage payments are consistently one of the highest that Americans have to battle each month. And with traditional mortgages pegged to 30-year terms, it can feel like a never-ending bill to pay.

A mortgage refinance, however, can significantly reduce the term of the loan - allowing you to save money and build equity simultaneously. 

Just crunch the numbers to see if it works for you. By reducing your term, you may end up increasing your payment each month. But if the ultimate goal is to pay off the loan as soon as possible then it may be worth dealing with the short-term rise knowing that there's light at the end of the tunnel. 

When you can change from an adjustable rate to a fixed rate 

Adjustable rate mortgages (also known as ARM) can be beneficial when you start out with a low interest rate. But following a pre-determined length of time that will change and rise. That could quickly lead to a mortgage payment you can't quite afford as easily. 

The volatility of the market and the stresses of an unknowable interest rate can be eased, however, by refinancing into a fixed-rate mortgage instead. This will allow for peace of mind and stability by ensuring that the interest rate you have in the beginning will remain the same for the life of the loan. 

Other considerations

If a traditional mortgage refinance doesn't sound like the best route, there are other alternatives that can help put cash back in your pocket.

  • Cash-out refinancing allows homeowners to take out a new home loan for an amount larger than what they owe on their current mortgage. They can then use the new loan to pay off the old one and take the cash difference between the two for themselves.
  • A reverse mortgage allows homeowners (62 and older) to tap into their home equity. The homeowner won't make a payment but will instead be paid by the mortgage lender via a variety of methods. The loan has to be repaid, however, if the house is sold or the owner dies.
  • A home equity line of credit (HELOC) will allow you to take a line of credit out on the equity you've accumulated in your home. The more you have in your home the more you can potentially get (although most lenders will limit you to around 80%). HELOCs generally come with lower interest rates than credit cards and personal loans, making this a particularly attractive option for many homeowners.
  • A home equity loan acts as a second mortgage, except this one you're taking out of the equity you've already accumulated in your home. Home equity loans work similarly to HELOCs. The interest paid for either credit option can also be deducted from your taxes if used for IRS-approved home repairs and renovations. 
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