Refinancing your mortgage refers to switching from an existing loan to a new one. People refinance their mortgages for plenty of reasons. It can help lessen monthly payments or shorten the loan’s term. Others do it to tap into their home’s equity. Learn more about the possible benefits of refinancing your mortgage as you continue reading below.
- Lower interest rates
The most common reason why people refinance their mortgage is to lower their interest rate. The money you save from paying less interest each month can also allow you to pay off your home loan faster, therefore building your equity.
If you have an existing loan, you may get penalized for not fulfilling the contract. Don’t let this stop you, though. Calculate how much the penalty and outstanding mortgage will be in comparison to how much money you’ll be able to save over time if you switch into a lower-interest loan.
- Get a hold of your home’s equity
Your home’s assessed value minus the unpaid mortgage determines the home’s equity. Getting a hold of your home’s equity value is possible through refinancing. You are free to do whatever you want with the money but because mortgage refinancing has a significantly lower interest rate compared to credit cards and personal loans, people usually use it for debt consolidation, investing, home renovations, or college tuition.
- Shorten the loan’s term
If having to pay your mortgage for more than two decades bothers you, grab the chance to pay a shorter-term loan through refinancing. Even if you aren’t able to find a lower interest rate compared to your current loan, having to pay for the same interest rate for 10 years instead of 20 will save you more in the long run.
- Switching the type of loan program
An adjustable-rate mortgage is a better option for most people due to attractive low-interest rates in the beginning. However, its unpredictability may end up costing a higher interest rate when summed up compared to a fixed-rate mortgage. Switching to a fixed-rate loan can protect you from future sudden spikes in interest rates.
However, if the mortgage interest rates are dropping and you only plan to live in your home for a few years, switching from a fixed-rate to an adjustable-rate will allow you to lessen the total interest rate and monthly payments you make.
Before you decide to refinance your mortgage, know all your options. Refinancing is a major move and you must be smart about it or else it could end up being a pricey mistake. To know if you should refinance, calculate how much your closing costs would be and compare it with how much you’ll be able to save if you proceed to do it. Check which lender has the best offers and read the fine print of your new contract before you sign up.