Refinancing can improve borrowers’ interest rates or help eliminate mortgage insurance.

Rates on home loans have dropped to levels not seen since 2016, and homeowners are rushing to refinance. You can benefit even if you don’t cut your rate by a full percentage point—a rule of thumb you can safely ignore. The question is whether you will stay in your home long enough to recoup the closing costs with savings on your monthly payments. Borrowers who closed on their loans in 2018 are leading the charge, according to Black Knight, an industry data, analytics and software provider. Say you got a $300,000 loan with a 30-year fixed rate last fall. If you refinance at today's rate, you could cut your monthly payment of principal and interest significantly. Borrowers with adjustable-rate loans (ARMs) are refinancing to fixed rates in the highest numbers since 2007, presumably to lock in a low rate they’ll never need to think about again. 

If you originally took out an FHA loan but have since improved your financial profile or accumulated 20% equity, you can refi into a loan backed by Fannie Mae or Freddie Mac and not only reduce your interest rate but also eliminate the cost of mortgage insurance, which applies permanently on most FHA loans. If you want to build equity more quickly—say, in anticipation of retirement—you could refinance into another, cheaper 30-year loan and use the monthly savings to prepay your home loan. Or, if you can handle a higher monthly payment, you could take a new loan with a shorter term of, say, 15 or 20 years. 

Source: Kiplinger