Refinance into a lower interest rate
For borrowers with strong credit scores (a minimum of 700, but the higher the better) and low loan-to-value ratios (LTV), this is an excellent time to shop around for low interest rates. More lenders are advertising rates in the low 3s and even 2s, but they’re also raising minimum requirements. You can compare refinance offers on Bankrate.
Before you apply for a refinance, check your credit score and LTV (use Bankrate’s LTV calculator). An ideal scenario for conventional refinancing is a FICO score above 700 and an LTV below 60 percent. Borrowers can qualify for refinancing with LTVs of 80 percent or lower. Anything more than 80 percent and private mortgage insurance kicks in.
Refinance into a different loan term
You can also change the term of your mortgage. If you want to pay off your mortgage faster (and reduce the total amount of interest you pay), you can refinance into a shorter loan. Of course, this doesn’t change the amount you owe, which means your monthly payments will be higher.
Let’s say you only have 10 years left on your existing 30-year mortgage. You can refinance into another 30-year fixed-rate mortgage with a lower interest rate. This will reduce your monthly payments, but you will pay more in total interest because you’re resetting your loan. To maximize your total savings, you should lower your interest rate and shorten the term of your mortgage.
Here are three scenarios that show what happens when you reduce the rate on a $200,000 loan to 3.5 percent with a 30-year, 15-year and 10-year fixed rate mortgage.
| 30-year fixed mortgage | 15-year fixed mortgage | 10-year fixed mortgage | |
|---|---|---|---|
| Monthly payment | $898.09 | $1,429.77 | $1,977.72 |
| Total interest paid | $123,312.18 | $57,357.710 | $37,326.08 |
| Total cost of the loan | $323,312.18 | $257,357.71 | $237,326.08 |
If your goal is to reduce interest on the life of the loan, then the 10-year fixed-rate option is the best one. Keep in mind that you might get a better interest rate on a shorter loan, which would help ease those monthly payments and further trim your total interest debt.
Cash-out refinance
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https://www.bankrate.com/mortgages/choose-the-right-kind-of-refinance/