mortgage refinance

The Benefits of Refinancing

You aren’t stuck with the mortgage you used to buy your home. If interest rates fall, your financial situation changes, or you need money from your home’s equity, you may refinance. Many people think they need to keep their original mortgage or it will cost them more money if they refinance.

While refinancing has closing costs, if you do it right, there are plenty of ways to save. Understanding the benefits and comparing them to your life situation can help you determine if you should refinance your mortgage.

Save Money on Interest

The most common reason to refinance is to save money on interest. If you can lower your interest rate, you’ll likely save money on your monthly payment. While that’s a great reason, there is an even greater reason.

When you lower your interest rate, you decrease the total interest you’ll pay over the loan’s term. If you lower it enough, you may save thousands of dollars off the bottom line by refinancing into a lower interest rate.

Secure a Shorter Term

Most borrowers take the standard 30-year term when they buy a home. It’s the most affordable option since it stretches your payments out over 30 years. You’ll pay the lowest amount of principal each month but pay more interest because you’ll have an outstanding balance for so long.

If your financial situation improves after you buy a home, you can refinance into a shorter term, such as a 15 or 20-year term. This can cut your mortgage term in half (or close to it), saving you thousands of dollars on interest. Just make sure you’re prepared to afford the higher payments because your principal balance will increase.

Borrow Money

If you’ve built up equity in your home, you may want to tap into it. Equity is the difference between your home’s value and your outstanding mortgage balance. Most loans allow you to take out up to 80% of the home’s value.

For example, if your home is worth $300,000 and you have a mortgage balance of $200,000, that leaves you with $40,000 you can take out. You must qualify for the higher loan balance with decent credit and a low enough debt ratio to prove you can afford the higher payment. If you qualify, you can use the funds however you want. Common reasons to tap into your home equity include home improvements, medical expenses, paying for college, and consolidating debt.

Look at your Break-Even Point

Before you refinance, look at your break-even point. This is the point the savings of the loan exceeds the costs to close the loan. Most loans have closing costs and if it costs more than the savings, it may take a long time to realize the savings, making the refinance pointless.

Bottom Line

Refinancing is a great way to save money if you do it right. Look at all your options including taking a shorter-term so you pay the loan off faster. Even if you need to tap into your home’s equity for a cash emergency or large expense, make sure the loan makes sense as your home and the mortgage are the largest financial decisions you’ll make in your lifetime. 

Leave a Comment

Your email address will not be published.