There are many reasons why a homeowner may choose to refinance their home. This strategy is most often used to achieve a lower interest rate through a new mortgage, and reduce monthly mortgage payments. Although it may appear like a no brainer, you must take many factors into consideration before preparing to refinance your home. For the purpose of this article let’s take a look at the potential benefits of refinancing your home.
Benefits of refinancing your home
- Should you refinance?
When you refinance your home, you are essentially replacing your existing mortgage with a new one. For instance, if you’re on a 30-year plan, you can choose to refinance to switch over to a 15 year mortgage plan, which will allow you to repay the amount owed faster. Whatever your reason for refinancing, you must be prepared in the same matter as you were with your first mortgage. Have your credit and/or income changed over the years since your first mortgage? These important factors may significantly affect your process to refinance your home, and even stop it dead in its tracks. You may be approved at a higher rate or not at all if your credit score dropped or your salary is lower than it was before. You should also expect to pay closing cost fees when refinancing your home. These fees generally range anywhere between 3% and 6% of the entire loan amount.
Benefits of refinancing
- Lower interest rate
One of the main reasons people choose to refinance their home is in the hopes of attaining a lower interest rate on their now new mortgage. Anyone who is looking to add extra cash to their monthly budget will benefit because a lower interest rate translates to lower monthly payments. Even if you’re not strapped for cash, a lower interest rate means you’re paying less for your home overall.
- Clear mortgage debt sooner
If you’re on a 30-year loan, refinancing to a 15-year mortgage means you will pay off and own your property that much faster. Although this option will increase your monthly payments, it will build equity on your home much faster as well.
- Cash out equity
Your home’s equity is the difference of what you still owe on your mortgage and your home’s current value. For example, If your property is valued at $500,000 and you owe the lender $200,000, the equity on your home is $300,000. When you choose to cash out on your equity through refinance, also known as cash-out refinance, you are borrowing against your equity to refinance for more than your home’s current principal balance. You can use the money to pay off college tuition, home remodeling projects, or investments.This option should be carefully considered as it does put you further in debt.
- Convert from adjustable to a fixed rate mortgage
Adjustable rate mortgages are popular amongst home buyers because unlike a fixed rate mortgage, they offer lower rates for the first few years of a mortgage term. When the fixed period expires, the interest rate shifts according to a benchmark index, which can at times an interest rate hike that results in higher monthly mortgage payments. That’s why this option is ideal for buyers who will reside in the home for only a short period of time. But if you change your mind, refinancing to a fixed rate mortgage is a great idea, as you will enjoy predictable monthly payments and an interest rate that will never change for the duration of your mortgage plan.
- More Options
Unless time is a matter of great importance, if you decide to refinance your home you will have the luxury of taking your time to shop around for the best deals. You won’t be under as much pressure as you were when initially purchasing the home because if the options are not to your liking you can walk away.