Benefits of Refinancing a Mortgage
There are numerous benefits of refinancing a mortgage. With the Federal Reserve recently announcing its plans to increase interest rates numerous times over the next couple years, many are wondering if the time to refinance is now.
Lower interest rates
One of the main reasons people refinance is to obtain a lower interest rate. For a homeowner with a $160,000 mortgage, a 1% decrease could equate to $100/month, or $30,000 over the life of the loan. The savings potential is noticeable and is even more significant for larger loan amounts.
Access the cash you need now
If you have equity in your home, most lenders will allow you to refinance up to 80% of the value of your home. This is referred to as the Loan-to-Value (LTV) limit and it is used to determine the loan amounts for most mortgage products. The money borrowed can be for anything you choose. Many people use the cash to make necessary/desired home improvements, address an emergency, pay off unsecure debts, car repairs, etc.
Caution is advised if taking cash out increases your monthly payment. Do not overextend yourself or risk losing your home due to an inability to pay your mortgage, especially for something not necessary.
Change to a more stable loan type
Some borrowers financed their homes with an adjustable rate mortgage. This may have been a necessary option and an attractive alternative during times of higher interest rates, but the unpredictability can induce unwanted anxiety. The fluctuation in monthly payments can result in increases of hundreds of dollars. Refinancing to a 30-year fixed rate mortgage at a lower interest rate offers security and the ability to budget the adjustable rate mortgages do not.
Pay off a mortgage more quickly
If the financial situation of a homeowners has changed for the better such as increased salary, significant inheritance, lowered financial obligations, refinancing a 30-year mortgage to a 15-year may enable them to reach their financial goals sooner than previously planned. In reducing the term of the loan, payments will increase but the home will be owned free and clear in half the time. The amount paid toward interest over the life of the loan reduced significantly as well in a 15-year mortgage.
Refinancing is a great vehicle to personal financial success. If you are considering refinancing, be aware of the associated fees. For most, the benefits and savings of refinancing a mortgage outweigh the costs.