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Reasons to Refinance

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Refinancing to Lower Your Monthly Payments

Lowering your monthly mortgage payment can have a positive impact on your budget. If you are among those homeowners whose original mortgage payment has turned out to be too high, refinancing your loan might help. But before you decide if this is the right choice for you, take a look at some of the details.

Potential benefits of lowering your payments

Lowering your monthly mortgage payment by refinancing to a lower rateFootnote 1 or extending your loan termFootnote 2 can make it easier to pay your mortgage on time every month, while also possibly covering your other debts and expenses. And if you are concerned about your ability to make your current mortgage payments in the future, lowering your payments now can help relieve that pressure.

Refinancing costs

Whenever you refinance, you’ll be responsible for paying closing costs. In addition, it’s common to refinance into another mortgage of the same term, typically another 30-year mortgage, which means you’d be restarting another 30-year mortgage after you’ve already owned your home for a number of years. As a result, you’d probably pay more in interest over the life of the loan. So while your monthly mortgage payments would decrease, your total costs over the long term would likely increase. It’s important to discuss your situation with your lender to make sure you’re comfortable with how these costs will impact your overall financial picture.

Your breakeven point

The breakeven point is how long it takes for a reduction in your monthly payments to equal the costs of refinancing. If you plan to sell your home before the breakeven point is reached, you probably would not recover these closing costs.

For example: if your refinance costs total $5,000, and refinancing will lower your monthly payment by $200, it will take you 25 months to break even on the costs.

Accomplishing your other goals

If you choose to refinance to lower your monthly payments, you may also have the opportunity to make additional changes to your loan at the same time. Depending on your circumstances, you may also be able to switch to a fixed-rate mortgage or borrow from a portion of your available home equity. Talk to your lender about what you’d like to accomplish and see what’s achievable for your situation.