If you’ve taken a mortgage, most probably you’ll 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. There are several reasons that many people consider refinancing to meet their goals.
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 of refinancing will help you make an informed decision.
Lower Monthly Payments
The biggest advantage of refinancing is securing better mortgage rates. If you find that rates have fallen since you took out the loan, switching to a loan with lower rates will help you in lowering your monthly payments. Sometimes, you may get lower interest rates if your credit situation has improved over time. A lower rate translates to lower payments, which means saving money on your home loan. By securing a loan with better rates, you can potentially shave thousands of dollars off your loan. For instance, you took a mortgage of $200,000 at 6% for 30-year which means you’re paying $1,199 as monthly interest. Now, if refinancing can help you secure a 5% rate of interest, your monthly principal and interest payment would reduce to $1,074.If you calculate this little saving over the entire loan period, it will reduce the cost of the mortgage by $45,164.
Switch from an ARM to Fixed Rate
Another benefit of refinancing is that it allows you to convert from an adjustable-rate to fixed-rate mortgage or vice-versa. Many homeowners want to change their existing adjustable rate mortgage to reduce rates. This is because initially, ARMs offers lower rates than fixed-rate mortgages, but over time the rate increases and goes higher than a fixed-rate mortgage. So, if you find that ARM is costing you more, refinancing can help you in converting it to a fixed-rate mortgage. This will result in reducing the interest rate and getting more stability in your finances.
Pay Off Your Loan Faster
Another great advantage of refinancing your mortgage is shortening your loan term so that you can pay off the amount faster. Most of the home loans extend over a longer period of time, which means paying interest for several years. However, if mortgage rates have fallen, shortening your term can help you in paying it down faster. For instance, if you have taken a 30-year home loan, you may refinance it into a 15-year term. This will increase your monthly payment if interest rates have not reduced. So, make sure that either rate has fallen down or your financial condition has improved to afford the payment. Refinancing to a 15-year mortgage means you can clear your mortgage debt in less time and own your home much sooner.
You may also refinance to consolidate your debt. Many homeowners use the cash-out refinance to pay off other debts to save money on interest and reduce their total monthly payments. However, before you take this step, evaluate the total costs of your refinance as compared to your other debt to determine if this will actually save you money.