You might believe that there's no way to refinance your mortgage if your current interest rate is lower than the market rate. The truth is, even if you refinance to a rate that is higher than your current one, you may still be able to save money on your mortgage. Here's a look at some of the reasons why you should consider refinancing even if you think you're going to end up with a higher interest rate.

Shorten the Term

If you refinance your mortgage now, it is likely to shorten your payment term. For example, you probably financed your home initially on a 30-year fixed loan. If you refinance your loan to a 15-year or 20-year mortgage, you'll shorten your loan repayment time. Since the interest on the mortgage compounds over the life of the loan, you'll probably be able to cut thousands off your loan repayment for the shorter term, even if it comes with a higher interest rate.

Sure, you could make extra mortgage payments every month on your current loan instead, but if you're still early in your loan, those extra payments are likely to apply to the interest that's accumulating, not paying down your principal. It will take some time before those extra payments really start to save you anything, while refinancing now will help you shorten your loan term and put you in a better position to have that mortgage paid off in much less time. Not to mention, paying down your mortgage early may lead to an early payment penalty.

Just remember that a shorter loan term also means higher monthly payments. Make sure you have the extra in your budget before you shorten the loan term. If a higher monthly payment isn't a viable option, you'll want to talk with the mortgage lender about refinancing into a longer-term loan. You'll save on your monthly payment amounts, though you might pay more in the long run due to the compounded interest.

Convert to a Fixed Rate

If your initial mortgage loan was an adjustable rate loan, you might find that an increase in the market interest rate costs you more than you bargained for. Even if your interest rate is lower than the market rate for a fixed-rate loan, it might save you over time by refinancing to that fixed rate. Otherwise, if the adjustable rate goes up beyond that rate, you'll pay more in interest than you need. Also, securing a fixed rate lets you budget consistently for your home payments every month. This can reduce your financial stress that could occur as a result of interest rate fluctuations.

Eliminate the Mortgage Insurance

If you have paid down your mortgage principal enough to produce sufficient equity in your house, you can refinance your mortgage to eliminate your mortgage insurance. Your mortgage lender can tell you how much equity you have in the house as well as how much you're paying in premiums for your home mortgage insurance. Your refinance will save you that premium every month for the life of your loan.

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