Why Should you Consider Refinancing?
It seems like everyone today is refinancing and who could blame them? Interest rates are at rock bottom levels, shouldn’t everyone refinance?
Refinancing can be a great way to save money or get into a more attractive loan, but it’s not for everyone. Read this guide to learn why you should (or shouldn’t) consider refinancing.
Top Reasons to Refinance
Most people benefit from refinancing. Here are the top reasons to consider it.
Lower your Interest Rate
You may be in a better position today than when you took out your mortgage originally. Since your mortgage interest rate directly affects your monthly payment, it’s worth exploring. Whether you improved your credit score or the market improved since you bought your home, you may be eligible for a lower interest rate today. A lower interest rate saves you money and helps you build equity in your home faster.
Changing your Loan’s Term
When you refinance, you can change your loan’s term in several ways:
Increase the loan’s term
If you need a lower monthly payment, you may want a longer-term. Keep in mind, this lowers your mortgage payment monthly but increases the interest you’ll pay over the life of the loan.
Decrease the loan’s term
If you are in a better financial position, you may want to shorten your loan’s term. Shorter terms, such as the 15-year term, usually have lower interest rates which save you money over the life of the loan, plus you’ll own the home a lot faster.
Keep in mind, you don’t have to refinance to decrease your loan’s term. You can make extra principal payments each month to pay the loan off faster and not pay the closing costs to refinance the loan.
Switch from an ARM to a Fixed-Rate Loan
Adjustable-rate loans are great during the introductory period because you have a low-interest rate. Once the introductory period ends, your rate adjusts annually, which can be expensive and make it difficult to budget.
Use your Home’s Equity
You build equity in your home as you pay the mortgage balance down. Your equity is the difference between the home’s value and your outstanding mortgage balance.
When you use your home’s equity, you own less of your home. You’ll need to consistently pay to reestablish the equity, but if you use the money to reinvest in your home, you may improve its value faster and earn the equity back quickly.
If you sell your house before you re-establish equity, you’ll receive less money at the closing, but you’ll have the funds in hand from the refinance.
Most lenders allow you to tap into 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, you can borrow as much as $40,000 in addition to your existing $200,000 loan. You’d receive the $40,000 in hand to use as you wish.