Why You Should Refinance
As a homeowner, your goal is to pay off your home loan as soon as possible. But, what if your current loan costs too much? What if you’re struggling with the payments?
Refinancing a mortgage loan might give you a new opportunity to reduce your costs.
But, is it right for you?
Waiting to Refinance Could Cost You Money
The most common and financially beneficial reason to refinance a mortgage loan is to reduce the amount you’ll pay to purchase your home.
The lower the interest rate, the less you’ll pay throughout the loan term. Right now, interest rates remain at low levels, making it sensible for property owners to consider refinancing.
If your interest rate is 1% higher than that of a new loan, you should consider refinancing. As of August 2018, experts predict that the Federal Reserve will continue to raise interest rates every few months.
By doing this, it gets more expensive for banks to borrow money. And this means that banks will increase the interest rates they charge to buyers. If you miss this opportunity to tap into a low interest rate, you could be costing yourself thousands of dollars.
If your interest rate is 1% higher than that of a new loan, you should consider refinancing.
For example, you owe $250,000 and have 20 years left to pay. With an interest rate of 6.5%, your current monthly payment is $1,580. Let’s say you refinance for a new 20-year loan, but you’re able to secure an interest rate of just 3.5%.
Your monthly payment drops to $1,450 per month, and you save over $31,200 over the lifetime of the new loan.
Refinancing Could Mean Paying Off Your Loan Sooner
Another key reason to refinance your mortgage is to reduce the length of time you have to pay it back. A shorter term means you pay less interest. It also means that you can get out of your home loan sooner.
In the above example, if you decided to refinance your 20-year loan into a 15-year loan, your monthly payment would be $1,790. This expense would be more than you are paying now, but by shaving off five years on the loan, you’d be able to save $57,500 on the interest.
These savings would be significant for any property owner.
In this situation, your goal is simply to pay off the loan faster. Some would say you could do that by paying more each month. While this is true, you can still ensure that it happens by locking yourself into a higher loan payment through a new mortgage.
Refinance Your Loan to Lower Your Payment
Whenever possible, paying off your loan quickly is ideal. But what if you’re struggling to make payments, and still want to stay in your home? You could refinance your loan to secure a new, lower monthly payment.
To do this, you could simply extend the term of your loan so you have more time to pay it off. This process will cost you more in the long run because the interest will build for a longer period of time. However, it could help you secure a more manageable monthly payment.
In the above example, if you refinanced into a 30-year loan (instead of the 20-year loan), your payment would drop. Your new monthly payment would be $1,125 if you secure a longer term and a lower interest rate. This would create significant monthly savings of over $450.
You Want to Use Your Home Equity
Another reason to refinance now is because home prices are on the way up. As your home value grows, so does your equity. Equity is the unmortgaged value portion of your home. In the above example, you owe $250,000 on your loan. However, let’s say your home is worth over $300,000. You have about $50,000 worth of equity in your home that you can take in cash.
But, why do this? You can use the money from this type of refinance for just about anything you need. Some people use it to pay off medical expenses. Others use it to consolidate their credit card debt. You could also take that money and put it towards remodeling your home.
If you were to use the money for a remodel, you might see the value of your home jump even higher.
Why Refinance Right Now?
If you are a homeowner, there are a variety of ways to know if you’d benefit from refinancing your mortgage loan.
#1: Interest Rates Are Low Now but Climbing
Interest rates remain very affordable at the moment. For anyone with a high interest rate, refinancing right now is essential. Most experts believe that interest rates will continue to climb as the economy does well and the GDP grows.
#2: Your Creditworthiness Is Better
If your credit score has risen, refinancing your mortgage could help you qualify for a significantly lower interest rate. You can get a quick estimate to find out.
#3: You Need a Lower Monthly Payment
If a longer loan term and a lower interest rate would allow you to make payments easier, then you should consider refinancing.
Don’t overlook how beneficial refinancing could be. However, the key is to ensure that you understand the costs associated with such a process.
Before you make any decisions, do your homework to see if refinancing is the right decision for you. And if it is, you might be able to save thousands of dollars over time.