Benefits of refinancing your mortgage
Purchasing a home is the biggest investment most people will make in their lifetime. It is typically not a decision that is done lightly, and the value of the home is usually a top priority for buyers. Being able to refinance your mortgage is one of the benefits of homeownership. Since your home is an investment, refinancing the mortgage is one way you can take advantage of this investment.
What do you need to know about home refinancing?
Most homeowners refinance their homes to take advantage of lower market interest rates, reduce their monthly payment by getting a longer payment term, or cash out a portion of the equity in the home. This can result in:
- A change of your loan term.
- The opportunity to get a break on the mortgage taxes (depending on State laws)
- Utilize the equity in the home for other financial needs.
How does home refinancing work?
When you refinance your mortgage, you take out a new loan to pay off your existing debt. The process is typically very similar to that of getting your first mortgage. It involves comparing interest rates and other mortgage terms to see what the market has to offer. It also helps if your credit score has improved since your first mortgage. This will put you in a better position for better financing.
Refinancing also involves closing costs, so it is good to compare what your upfront and monthly costs will be as opposed to your current loan.
Reasons why you should refinance your home?
- Cash-out equity – If you have significant equity in your home, it may be able to clear large bills, make a significant purchase or investment by cashing out that equity.
- Adjust your loan term – you can choose to shorten or lengthen your loan term with a new mortgage. This could result in lower interest rates and overall mortgage payments.
- More predictable payments – If your mortgage is currently an adjustable-rate mortgage (ARM), you could benefit from a fixed-rate loan for the remainder of your mortgage. This way, your monthly payments won’t change even if the markets rise.
- Debt consolidation – By cashing out on a portion of your equity, you can use that money to consolidate your debts. Since mortgage rates typically have lower interest than credit cards and unsecured loans, you could save money by clearing those debts through refinancing. You could also combine two mortgages into one smaller mortgage.
The benefits of refinancing your mortgage
- You may end up with a better mortgage rate. – This is usually the top reason that homeowners refinance their homes. If the mortgage rates have decreased since you first received your loan, you can save money by refinancing. This will give you the benefit of getting a new loan and the current lower rates. If your credit score has improved, you may also qualify for better rates.
- Lower mortgage rates usually mean lower interest rates. Also, by extending your loan term, you may also lower your monthly payments. The thousands you could end up saving could be used in another investment, to clear another high-interest loan, or even toward long-term savings.
- Clear your mortgage early – Refinancing sometimes gives borrowers the opportunity to shorten their loan period, hence paying off their mortgage earlier than the initial loan term. If you have had your loan for a number of years, you could reduce the loan term without much change to your monthly payment. Since your loan will be paid off in a shorter period, you will evidently pay less in interest expenses.
- Remove private mortgage insurance – If you finance more than 80% of your home’s value, you will typically pay private mortgage insurance (PMI). By refinancing your mortgage, you may be able to remove this expense completely. This is available to homeowners who have a lower loan-to-value amount than 80%, whether due to a reduced loan amount, increased home value, or a combination of the two.
The bottom line is that refinancing could be a great option for you, but it will ultimately depend on your individual circumstances.
Thinking of refinancing your home or ready to jump into the buyer’s market? Visit our website to learn more about our mortgage options and contact us with any questions!