The benefits of home refinancing
Image by shannonpatrick17 via Flickr
If you financed your house some time ago, you may have been aware of that interest rates have dropped significantly in the interim. In this case, it really does not make much financial sense in most circumstances to continue paying a high interest rate when you can refinance for a lower interest rate. This will allow you to take advantage of a lower monthly mortgage payment and pocket more money each month. Usually, the only good reason for not refinancing when interest rates have dropped considerably is when you know you will not remain in the house long enough for the cost of the home refinancing to be offset by the savings.
While certain factors, like your credit rating and the amount of the down payment that you were able to afford, influenced your interest rate, the single most important factor was the prevailing rates at that moment. However, interest rates fluctuate. When the Federal Reserve enters a rate-cutting period, the prevailing rates may become significantly lower than when you originally purchased your house.
One of the best benefits of home refinancing, is that you can have a lower level of monthly payments for the loans that you already owe. When you refinance your house you can often get lower interest rates and therefore lower monthly payments as a result. By home refinancing with a lower interest rate you will be able to reduce the monthly payments that you have to make for both the interest and principal.
When interest rates are low, adjustable rate mortgages (ARMs) are the housing market’s darlings. However, as interest rates increase, that adjustable rate may not look as sweet. If, however, you’ve become financially stable and know that you’ll be staying in your house for several years, it may be beneficial to swap that fluctuating adjustable rate for a fixed one. You’ll have more security knowing that your monthly payment will remain steady, regardless of the current market environment.
Regardless of which type of home mortgage refinancing you ultimately decide is best for you, it is important to remember that you may also be able to take advantage of important tax advantages as well. Consult your tax advisor to find out whether you can deduct the interest on your home equity loan. You may be surprised to discover that it is completely tax deductible; something that can not be said for credit card interest.
Let’s say, for example, that you originally had a 30-year mortgage and have been paying it for eight years. Thanks to a mortgage refinace, you can switch to a shorter term of either 10, 15 or 20 years. This can save you thousands of dollars of interest. Also, if the refinance rate is lower, but you maintain the same monthly payment, you will build up equity in your house more quickly, because more of your payment will be going towards principal.
Another common reason for home mortgage refinancing is to actually reduce the length of your mortgage loan. This type of mortgage refinance allows you to pay off your mortgage sooner and over the duration of the loan save far more money in interest payments. In many cases, you may also be able to take advantage of receiving extra cash from your refinance while lowering your monthly mortgage payments if rates are lower. Of course, another option would be to keep your payment the same and pay off the loan even faster while also enhancing the equity.
When you refinance, you lower your interest rate and consequently lower the amount you need to pay. Who wouldn”t want this deal? The amount you save may be used to pay off other bills, or you can save this to pay for a part of your principal. Of course, you should never fall into the lure of spending some more just because you have extra money on hand.
In fact, many people still consider lower interest rates to be the biggest advantage of a home loan refinance. First, you have a fixed rate mortgage but the rate on your mortgage is higher than current interest rates. Second, you have an adjustable rate mortgage and you are tired of living with interest rate changes on your mortgage loan. In either case, a home mortgage loan refinance can help to solve your problems.
Generally, it is a good idea to go ahead and refinance when you think you will be in the house long enough to offset the cost of the refinance with the amount of money you will save each month over the long run. For most homeowners this is about two years; however, that time frame could be largely dependent on exactly how much money you are able to save every month with a home loan refinance and how much it costs you to refinance. If you find that you are able to save more money when you refinance your mortgage, it will not take you very long to recoup the cost of the refinance through your savings.
That’s just a half a point lower than your current mortgage. However, the financial calculator reveals that your monthly payment would drop to $1,297.20 and the total interest you’d pay would drop to $266,992. So you’d save $67.15 per month and also $24,174 in total interest paid in 30 years.
Get rid of the hidden costs that are often associated with private mortgage insurance. With your home mortgage refinance, there are certain costs that you have to pay. The problem, however, is that not all expenses become upfront. One of these is the private mortgage insurance. You need to pay this if you’re going to borrow money that’s worth over 80 percent of the total value of your house. This can cost a lot for you. If you want to get rid of this, you need to make sure that you can limit your home refinancing to about 30 percent of your home’s equity. Hence, if you want to increase your refinancing loan, the best way is to also increase the overall value of your house by doing some improvements.
Home mortgage refinancing is also very popular when you gain extra money from any type of business available. You can use that money as an upfront payment for home mortgage refinancing. This brings in the need to understand the term of “point” when talking about mortgages. Refinancing lenders might require a number of points as an upfront payment. One point is equal to 1% of the value of the loan. So, if the requirements are for 10 points, this means that the borrower will need to pay 10% of the value of the loan amount in cash.
A refinance mortgage loan can help you get cash for the equity in your house. home equity refers to the value of the house that has already been paid for. This will include your down payment and the all the monthly payments you have been making. Once you have built up a substantial investment in your house, you can use that to get a refinance mortgage loan, which will give you cash on your equity.
The last of the benefits of home refinancing is that you can use the equity that you already have built up. You can cash out the equity for various purposes, including financing your future education needs or improving your house. A line of credit with equity can be taken out, but the money will not be sent to you all at once. Don’t forget that, while this is one of the best benefits of home refinancing, you are using your house as collateral, so spend the cash out money wisely.
In some cases, customers may wish to get cash out of their house. People can use this cash to pay off credit cards, to pay for college tuition, to pay medical expenses, or even purchase another home.
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