Benefits of refinancing your mortgage
Refinancing can be an incredibly convenient way for you to achieve your personal and financial goals. However, the terms of your new loan and the reasons for your refinancing may affect the benefits of refinancing for you.
Next, you’ll find some of the benefits of refinancing so you can be better prepared to determine if this option is right for you.
Lock in a lower interest rate
Getting a low mortgage interest rate is one of the most common reasons to refinance, especially if rates are lower now than when you first took out your mortgage. Lowering your interest rate can help you save money on interest payments over the term of the loan.
Factors to consider before taking advantage of a low mortgage interest rate include;
- How long have you had your current mortgage
- The difference between your current mortgage rate and your new mortgage rate
- How much you could spend to close your new loan
Before choosing to refinance at a lower rate, discuss with your lender how much money you will actually save over time.
Pay off your mortgage sooner
Refinancing is a great option if you’re looking to shorten your loan term and pay off your mortgage sooner. For example, if you have a 30-year mortgage and you have 25 years left to pay it off, refinancing to a 15-year mortgage means you will pay it off 10 years earlier than expected.
The trade-off is that your monthly mortgage payments will be higher. But you’ll pay more for the principal balance and less interest over the life of the loan. Plus, you’ll increase your home’s equity at a faster rate.
Reduce your monthly mortgage payments
On the other hand, you may want to lower your monthly payments. Refinancing allows you to extend the term of your loan if you are having difficulty making your payments. The downsides are that you will pay off your mortgage longer and pay more interest over time. However, a longer loan term can make your monthly payments more affordable and free up some extra cash.
Convert your home equity into cash
As mentioned earlier, a cash refinance allows a borrower to tap into the equity in their property and convert it into cash. If you meet the requirements for a cash-out refinance, you’ll borrow more than you owe on your mortgage and keep the difference in cash. Keep in mind that for most cash refinances, you must leave at least 20% equity in your home.
For example, let’s say you have $200,000 left on your mortgage and your home is appraised at $300,000. This means you have $100,000 in home equity. Say you want to use $50,000 of it for different things.
You can use cash refinance to borrow that $50,000 against the equity in your home. So your new mortgage balance would be $250,000 ($200,000 + $50,000).
You can then use this money to achieve various financial goals, such as financing home improvements or renovations, consolidating debt, or increasing a savings, college or retirement fund.
Switch to a fixed rate mortgage
If you have an adjustable rate mortgage (ARM), which can come with fluctuating interest rates and unpredictable monthly mortgage payments, a refinance can help you transition to a more reliable fixed rate mortgage. If mortgage rates are now low, switching to a fixed rate mortgage can help you get a lower mortgage rate and save money on interest.