The ultimate goal of refinancing is to lower your interest rate which in turn, lowers your payments and the total cost of your loan. When it comes to refinancing your home, you are basically obtaining a whole new mortgage (complete with new terms, fees, etc.), to replace your old one.
Refinancing can be extremely beneficial under the right circumstances, but before doing so you should ask yourself the following questions:
Is my credit in good standing?
Do I plan to stay in the home for a while?
Am I able to pay the new closing costs?
If you can answer “yes”, to the questions listed above, then refinancing your home is likely a good option for you. By refinancing, not only will you be able to lower your interest rate, but in some cases, it will also allow you to pay off your home faster. Below we have listed three major benefits of refinancing your home loan.
- Build equity and pay off your home faster. If your goal is to pay off your mortgage faster, refinancing to a 15-year mortgage from a 30-year mortgage is a good option. Not only will this help you to own your home free and clear in less time, but by doing this you will also be able to build up equity in your home much faster. However, it is important to keep in mind that if you choose to go this route, your monthly payments will increase, but you will end up saving much more money in the long run by being able to pay the loan off sooner.
- Lower your interest rate and monthly payment. If you are considering refinancing your home loan, there is no better time than the present. Right now, interest rates are at a historic low. However, according to finance professionals, this may change in the near future. It is hard to predict exactly when interest rates will be on the rise again, so you may want to consider making a move sooner rather than later. Because interest rates are extremely low at the moment, this help people who refinance “break even” much quicker. In order to determine when you’ll break even after refinancing, simply add up all of the expenses associated with refinancing (application fees, administrative fees, closing costs, etc.), then compare it to how much you’ll save each month with your new monthly payment. For example, if it will cost you $5,000 to refinance and you’ll save an estimated $300 each month, it’ll take you about 16 months to break even (5000/300=16.66). If you plan in staying in the home for a while, it will be well worth it in the long run.
- Obtain cash to reduce debt. A cash-out refinance is an option available to homeowners who are looking to obtain cash for debt or expenses. In this case, homeowners would replace their current mortgage loan with a new loan that is more than the amount owed on the property. The borrower is then able to obtain the difference in cash to spend however they wish. For example, let’s say you have a home valued at $200,000 and still owe $140,0000 on it, and you want to obtain $30,000 of cash to pay off student loans—you can refinance the loan for $170,000 ($140,000 + $30,000), and walk away with a check for $30,000. This is a great option for homeowners who not only want to lower their interest rate, but who need a certain amount of cash to pay off debt or other personal expenses.
Whether you are a homeowner looking to pay off your home sooner, reduce your monthly payments, or obtain cash for personal expenses, refinancing may be a viable option for you.
Until Next Time,