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Why you should refinance your mortgage in 2023

Depending on your goals and personal circumstances, a mortgage refinance may still be right for you. Getty Images/iStockphoto

With inflation still hovering in the background many Americans may be considering ways to both make extra money and cut corners to help save. Fortunately, there are multiple ways to access extra cash, save on insurance types and even cut lingering holiday debt

One traditional way to reduce costs tied to existing debt is refinancing. Whether you have a personal loan, student loan, or home loan, refinancing can potentially save you money both short-term and over the life of your loan. It can also reduce the term of your loan so that you can use the money elsewhere.

Mortgage refinancing, however, isn't beneficial for all homeowners. In the current rate environment with rates hovering around 6%, there are only select homeowners who would benefit from acting. Not sure which category you fall into? Use the mortgage refinance calculator below to crunch the numbers.

Why you should refinance your mortgage in 2023

There are three primary types of homeowners who may benefit from refinancing their mortgage now. Do you fall into one of these categories?

Homeowners who can get a lower interest rate

Mortgage rates fell to historic lows during the height of the coronavirus pandemic in 2020, prompting many homeowners to refinance their existing mortgages. With that being said, there may still be an opportunity for current borrowers to act. It's generally considered beneficial for homeowners to refinance if they can drop their existing interest rate by a full percentage point. So, if you have an interest rate of 7% or more now - and have a good credit history that would support refinancing - then it may make sense to act.

That single percentage point rule is not mandatory, however. If you have a higher rate than what's currently being offered and want to save everything you can then it still may be worth acting. Every dollar counts. Just note that when you refinance you'll have to close on your home all over again - and that includes paying for closing costs. So if you're not planning on staying in your home long enough to recoup the expenses from closing on a refinance then it may not be worth it.

Every homeowner's personal circumstances are different, however, so it's best to crunch the numbers for yourself below to see how you could benefit.

Homeowners who want to reduce their loan length

Another huge benefit to refinancing? Wrapping up your loan sooner than anticipated. If you could use the boost that you would receive without having to make a mortgage payment each month then refinancing may be for you.

One note: refinancing to a shorter term frequently causes your payments to rise, albeit over the new, shorter time period. This will still save you money because you won't be on the hook for interest spread out over the original lifespan of the loan. It just won't likely save you much, if anything, short-term since you're essentially consolidating what you owe into a shorter time frame.

But if you could use the money you're currently paying your mortgage for something else - and can afford temporarily higher payments - then refinancing may make sense for you.

Homeowners who want to drop their PMI

If you originally purchased your home with less than a 20% down payment then you may have been charged private mortgage insurance, also known as PMI. The extra amount tacked on to your monthly payment, however, can potentially be removed via refinancing if you've subsequently met the 20% equity threshold in your home.

You can easily determine if this is the case by comparing the amount of money you currently owe to what you think your home is approximately worth on the current market. If the difference surpasses or equals that 20% then you should reach out to a lender to talk about refinancing.

Again, the same consideration about closing costs applies, so make sure that the money you will potentially save isn't washed out by costs you'll incur (and fail to make up) at closing.

The bottom line

Mortgage refinancing was advantageous for a wide swath of homeowners in recent years. And while the rates are not nearly as appealing as they once were, there are still many borrowers who can benefit from refinancing their mortgage now.

If you want (and can) reduce your interest rate, want to finish paying off your loan sooner or are just looking to finally drop that nagging PMI, refinancing may be for you.

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