If done correctly and at the right time, refinancing your existing home loan is an excellent way of reducing your total debt load and can provide you with significant monthly savings on your mortgage payments.
It’s important to note that refinancing isn’t free. It’s going to cost you between 3-6% of your current outstanding mortgage principal, due to closing costs. In rare cases there are even prepayment penalties to be concerned about.
While refinancing isn’t a good idea for everyone, it might just be perfect for your situation.
Here are 5 advantages of refinancing your mortgage – right now!
1. You Can Pay Less Interest
Just look at that chart above! Do you see just how magical of a time we’re living in right now? Perhaps not for investing, but certainly for borrowing.
For most homeowners, the goal of refinancing is to obtain a mortgage with a lower interest rate in order to save money on future repayments.
If you purchased your home before 2008, when interest rates were high, refinancing can save you a large amount of money.
If your credit rating has improved since your first mortgage, you’re also more likely to secure a better rate.
What does a better rate get you? Sure, it gets you a lower payment, but it also saves you tons in interest charges.
For example, on a $300,000 loan at 6% for 30 years, you will pay $347,514.57 in interest. But with the same loan at 4%, you end up paying $215,608.52. Yeah, I’ll take saving over a hundred grand any day of the week!
2. You Can Reduce Your Loan Term
Wait, if you’re getting a new mortgage, aren’t you extending your loan term? Well not if you switch to a 15 year mortgage instead!
Refinancing can save you thousands of dollars in interest in the long run if your second mortgage has a shorter term than the first.
But doesn’t that mean that your payments will go up with a shorter loan? Not necessarily. Interest rates on 15 year mortgages are ridiculously low (currently about 3.25%).
For example, a $300,000 loan at 6% for 30 years equals a $1,800 monthly payment. If you now owe $250,000 and are 10 years in, you can get a 3.25% 15 year mortgage at payments of only $1,757 a month. You will thus shave off 5 years of your original mortgage and get a lower payment for the next 15 years.
3. You Can Get Cold Hard Cash
I know you work hard, but did you know your house has been hard at work too? For all the years you’ve been paying your mortgage, your house has been creeping up in value.
While you shouldn’t use your home’s equity as your personal piggy bank, there are times when it may make sense to cash in.
When you do what’s called a “cash out refinance” you are getting a new 30 year loan on what you owe, plus you’re taking money out on top of that. This means that your new loan is even bigger.
Cashing out some equity is only a good idea when the homeowner plans to use that received cash to add value to their home, either through remodeling or building onto the property.
4. You Can Get Out Of An Adjustable Rate Mortgage
Maybe your credit wasn’t that good and all you could afford was an adjustable rate mortgage. With rates surely to creep up in the next few years, it makes sense to get out of an ARM.
Another good reason to refinance out of an ARM is in a situation where you originally bought your home with the intention of moving within a few years, but have since decided to stay for the long term.
Sticking with an adjustable rate mortgage is risky in the long run, and it is often more prudent to switch to a fixed rate mortgage if you plan to keep the property.
5. You Can Lower Your Monthly Payment
By far the best reason to refinance your house is to decrease your monthly mortgage payment.
When you stretch the loan to 30 years all over again, your payment will certainly go down.
If you’re a good 20 years into a mortgage, it’s probably not a good idea to start all over. But if you can’t afford the payments and don’t want to move, refinancing is your best bet to keeping your home.
Be sure to only do this if you plan to be living in your home long enough for the costs of refinancing to be recouped by the savings you make on your new mortgage payments.
Have you ever refinanced your home? If so, why did you do it and do you regret the decision?