You’re watching the interest rates drop, and comparing them to your own mortgage rate. But are the benefits of refinancing worth the work of handling the paperwork and paying the refinancing costs?
People often focus on the lower interest rate. It makes a significant impact on your loan, but it’s not the only reason to refinance.
You can reap lots of financial benefits from resetting your mortgage at a lower rate, from being out of debt faster to using some of the equity for other financial needs.
Check out these benefits of refinancing to decide if it’s the best option for you.
1. Decrease Your Payment
One of the biggest perks of refinancing is paying less each month. Lower interest rates translate into lower payments, sometimes with significant decreases. Making a smaller mortgage payment frees up income to go toward other debts or financial needs.
Your payment may not go down if you cash out your equity. The payment may also stay the same or increase if you shorten the length of your mortgage. Check with your lender to find out the exact amount of your new mortgage payment for budgeting purposes before you complete the refinance.
2. Shorten Your Mortgage Term
Taking out a 30-year mortgage worked when you first bought your home. But maybe you’re in a better financial position now and can make larger monthly payments.
Whatever the reason, going from a 30-year mortgage to a 15-year mortgage accelerates your payoff significantly. You can also generally get a lower interest rate on a shorter loan term, which can drop your payments more.
The difference between your current 30-year mortgage payment and a 15-year mortgage payment may not be as much as you think. The equity in your home means you now have a smaller balance to refinance, which means a smaller refinanced loan amount. If you can also lower the interest rate, that can drop the payment even more.
3. Cut Private Mortgage Insurance
Sometimes you don’t have enough money for a 20% down payment on your mortgage. If you don’t, you’ll likely have private mortgage insurance (PMI) added to your monthly payment. PMI is often between 0.3% and 1.2% of your mortgage amount each year.
If you have enough equity in your home to reach the 20%, you can refinance to get rid of the PMI. Dropping the PMI can save you a significant amount on your monthly mortgage payment. Add that to the overall lower payment due to a better interest rate, and the savings add up even more.
4. Choose a Different Type of Loan
Is your loan structure still working for you? No matter what type of loan you start with, a refinance lets you change the type of loan you have.
Say you start with an adjustable rate mortgage (ARM) to get a lower interest in the beginning. After the initial fixed period, your interest rate can vary significantly. Lots of factors can influence mortgage rates and the housing market as a whole, including economic recessions.
If you don’t like the uncertainty of the changing interest rate, you may want to switch to a fixed-rate. This gives you a consistent payment so you know what to expect each month.
You may also want to make the switch when mortgage interest rates start increasing. Your ARM rate will continue increasing. By locking in the current rate in a fixed-rate loan, you put a cap on how much it goes up.
You can also go from a fixed-rate mortgage to an ARM. This can be helpful when rates are continuing to drop, especially if you’re not planning to stay in your home forever.
5. Pay Down Other Debts
Cashing out the equity in your home when you refinance frees up cash for other uses. This can be helpful if you have a large amount of credit card debt or student loans.
Using down the money to pay down those debts frees up more of your income that normally goes toward those monthly payments. Interest rates on credit cards are typically higher than mortgage interest rates, at 14.14% on existing credit card accounts and 19.24% on new ones. Eliminating those higher interest rates by paying off credit cards with the equity saves money overall.
You can also help improve your credit score. Paying off credit cards typically increases your credit score. If you continue paying your refinance mortgage on time, you can keep your credit score higher, which benefits you for future borrowing needs.
Some homeowners use the cash equity for other financial purposes, such as paying for a child’s college. If you want to make improvements to your home, you can use the cashed out equity for that.
Always consider the financial consequences of cashing out the equity. Make sure the financial gain outweighs losing that equity in your home.
6. Increase Equity Faster
If you choose to not cash out the equity in your home, refinancing can help you build more equity faster. By shortening the term of your refinanced loan, you’re paying more toward the mortgage each month.
With each payment, you’re chipping away at the balance much faster. As you do that, you earn more equity in the home because you’re paying off what you owe at a quicker pace.
Increased equity in your home gives you greater financial stability. It also puts you in a better position if you decide to sell your home in the future. You can make a larger profit on the home sale, which can go toward your new house.
7. Remove Someone From the Mortgage
In the case of divorce, one partner may decide to keep the house. Removing the other spouse from the mortgage requires you to refinance the loan. It releases that person from being held financially responsible for paying the mortgage.
Another similar situation is when you secured the mortgage with the help of a co-signer. You may eventually improve your credit score and financial situation so you no longer need the co-signer. Refinancing lets you remove the co-signer so that person isn’t help liable for paying the mortgage.
Enjoy the Benefits of Refinancing
What’s your favorite reason for refinancing? Whatever your motivation, a mortgage refinance can help you get ahead financially. Look at all of the pros and cons before you make your decision.
Are you ready to take advantage of the benefits of refinancing? Get started on your refinance quote today.