If you’ve taken a mortgage, you’ll probably think about refinancing it at least once throughout the life of your loan. Mortgage refinancing is a strategy that offers you a completely new mortgage with more favorable terms. Many people consider refinancing to meet their goals for several reasons.
Whether you’re looking to lower your mortgage payments or want to get your home loan paid off faster, refinancing might be the right option for you. However, refinancing your mortgage is a big financial decision and must be made after doing due diligence. So, if you’re confused about refinancing your mortgage, the following benefits will help you make an informed decision.
Lower Monthly Payments
The biggest advantage of refinancing is securing better mortgage rates. If rates have fallen since you took out the loan, switching to a loan with lower rates will lower your monthly payments. You may get lower interest rates if your credit situation improves. A lower rate translates to lower prices, which means saving money on your home loan. By securing a loan with better rates, you can potentially save thousands of dollars off your loan. For instance, you took a mortgage of $200,000 at 6% for 30 years, which means you’re paying $1,199 as monthly interest. If refinancing can help you secure a 5% interest rate, your monthly principal and interest payment would reduce to $1,074.Calculating this little savings over the entire loan period will reduce the mortgage cost by $45,164.
Switch from an ARM to a Fixed Rate
Another benefit of refinancing is that it allows you to convert from an adjustable rate to a fixed-rate mortgage. Many homeowners want to change their existing adjustable-rate mortgages to reduce rates. Initially, ARMs offer lower rates than fixed-rate mortgages, but over time, the rate increases and becomes higher than that of fixed-rate mortgages. If ARM costs you more, refinancing can help you convert it to a fixed-rate mortgage. This will reduce the interest rate and give you more stability in your finances.
Pay Off Your Loan Faster
Another great advantage of refinancing your mortgage is shortening your loan term to pay off the amount faster. Most home loans extend over a longer period, which means paying interest for several years. However, shortening your time can help you pay it down if mortgage rates have fallen. For instance, if you have taken a 30-year home loan, you may refinance it into 15 years. This will increase your monthly payment if interest rates have not been reduced. So, ensure that either rate has fallen or your financial condition has improved to afford the cost. Refinancing to a 15-year mortgage means you can clear your mortgage debt quickly and own your home much sooner.
Consolidate Debt
You may also refinance to consolidate your debt. Many homeowners use the cash-out refinance to pay off other debts, save money on interest, and reduce their monthly payments. However, before you take this step, evaluate your refinance’s total costs compared to your other debt to determine if this will save you money.
