Have you ever reconsidered refinancing your home? Many people cover their ears when they hear the term “refinance,” based on how stressful they found refinancing their home the first time!
There can be many benefits to refinancing, however. We’ve listed four different situations why a refinance might work to your advantage. If one of these possibilities sounds like something that could work to your advantage, get in touch with your mortgage provider and review your options.
And, if you didn’t enjoy your first financing experience, don’t worry: You can absolutely refinance with a different mortgage provider without losing any of the benefits!
01) Lower Your Interest Rate
It’s tough for a current homebuyer to consider what previous generations had to deal with in terms of finance. Rates are currently about as low as they’ve ever been.
Someone who bought a home in 1995 with a fixed rate, however, probably has a rate near 9 percent. This buyer still has more than a decade left to pay off their mortgage, and they realize they can ultimately save thousands by taking today’s much more conservative rates—around 3.5 percent. If they borrowed $300,000 when they bought it, they’ll pay $2,400 monthly on the home…and nearly $1,600 of that will be interest. If they refinance down to 3.5 percent today, that will significantly decrease the amount they pay on interest, ultimately saving them thousands over the lifetime of the mortgage.
02) Solidify Your Interest Rate
Some buyers may have opted for an adjustable rate mortgage, because these feature fixed periods where the initial interest rate is below the market’s. The rate then begins to fluctuate after that fixed period. These buyers might find the current going rate far too appealing to pass up.
They can refinance to get out of their current mortgage and lock down the current low rate. No need to worry about future fluctuations.
03) Shorten Your Term
Many people aren’t at the peak of their financial lives when they buy their first home—that’s why mortgages exist. At the beginning, people often want to pay as little as possible on a monthly basis because, well, they don’t have a lot of money to spend. After a decade or two, they might have a lot more money in the bank and are looking to get their home paid off as soon as possible.
In this case, refinancing from a 30-year to a 15-year fixed rate mortgage makes sense. This will increase your monthly payments significantly—as you’ll now relatively be paying two months off at a time—but it will also bring the much lower interest rates that come with a shorter mortgage.
04) Cash Out Your Equity
This option is more risky but can come to benefit confident borrowers who need a few extra bucks to invest or spend on a project. Cash out refinancing is when someone refinances a home for more than it’s worth in order to get a quick influx of cash.
Maybe our previous example, with the $300,000 mortgage, only owes $70,000 at this point. They can refinance the home for $100,000 and simply keep the additional $30,000. Maybe they want to put a down payment on a vacation condo.
This is different than a home equity loan. Although you pay closing costs on a refinance, you also tend to pay much lower interest rates than with a home equity loan. Cash out refinancing is also part of your mortgage, and not a separate loan. Do the math and decide whether a cash out or a home equity loan will cost you less by the time it’s paid off.