If you’re a first-time homeowner, you may have heard of refinancing as a viable way to save money on your mortgage. But is it truly the best way to handle your finances?
If you’re able to secure better deals in your mortgage plans, such as a lower interest rate or more flexible terms, then it’s often ideal to refinance your mortgage. Since you already have your property under your possession, refinancing would be easier than securing a new loan.
That said, refinancing isn’t always ideal for everyone, as the current loan’s principal may remain your best option or the cost savings is too low for the effort to switch your provider. After all, refinancing also entails other costs, such as appraisal, title search, and application fees.
Ultimately, whether or not you opt to refinance is a personal decision, but it’s not a “one-size-fits-all” package. Refinancing may help you if your mortgage interest rates are high. But in other cases, it may also lead to an increase in your loan term, which is something you should pay attention to in the long run.
However, we can’t deny the pros of refinancing either. Here’s some more info about refinancing and its benefits that you should know.
What Is Refinancing?
Refinancing a mortgage means opting out of an existing loan and switching to a new one. The new loan typically comes with different and better terms that financially incentivise you (the homeowner) to make the switch.
This financial decision can be great for opting out of high-interest rates, consolidating debt, and getting special perks that help you pay your mortgage faster. In general, refinancing is a great way to save more money from homeownership and steep debt obligations, both in the short term and the long term.
Refinancing can be beneficial to you if you’re adequately informed about the rates and terms of your new mortgage plan. Learn more on how to refinance here.
4 Benefits Of Refinancing
Refinancing comes with a lot of advantages, but it’s important to know that most loan conditions vary in terms and interest rates.
Some of these mortgages might have a lower interest rate, lowering your monthly repayments. Others might offer shorter loan terms. Many will have a combination of both terms, plus some other additional perks.
You’ll have to shop around to find the best mortgage plan for your needs.
That said, here are some of the benefits of refinancing in more detail.
Lower interest rate
One of the primary driving factors for refinancing is the lower interest rate. Refinancing is for you if you are paying a mortgage with a high-interest rate. A reduction of even a fraction of a per cent will help save more money over the life of your loan.
Suppose you have a loan of $200,000 for 30 years with an interest rate of 6.5%. Your monthly payment comes to $1,257. After refinancing to a lower rate, say by 5.5%, your new monthly repayment totals about $1,130 monthly. With this new term, you save around $1,524 annually. If you have a fixed mortgage plan, that can be over $45,000 throughout the mortgage.
Shorten loan term
Paying off your loan sooner is another important motivator for refinancing. By refinancing to a shorter loan term, you decrease the number of times you’ll have to pay interest over the given loan period, which ultimately saves you more money down the line.
More often than not, you can refinance your mortgage with a reduced interest rate if you have a 30-year mortgage. When you refinance and decrease your monthly interest payments, you can shorten the loan term and gain freedom from the debt much faster than if you stuck with your original mortgage.
Switch interest type
You might consider refinancing to a fixed interest rate mortgage if your interest rates are volatile or variable. Doing this allows you to plan your monthly budgets to know that your monthly interest will remain the same.
Borrowers generally have two options when it comes to the types of interest rates: fixed and variable rates. These loan structures aim to give some flexibility to consumers who feel restricted by a single interest type. That said, knowing the current market conditions is a crucial factor in helping you decide the optimal type of interest rate you should get.
You can do a cash-out refinance, which allows you to use the equity you’ve built in your home to borrow money. This amount can be reinvested back into your home to make renovations or repairs, boosting its value.
You can also use this money for expenses such as education or medical costs if you cannot access other funds. This, however, doesn’t mean that the bank gives the money freely.
Let’s say your house is valued at $400,000, and your mortgage is $250,000. This shows you have $150,000 in home equity that you can borrow for your home.
The bank uses the current value of the house to refinance your mortgage. But these mortgages are riskier as the interest rates may be higher, increasing your debt obligation.
What To Consider Before Refinancing?
Refinancing may benefit you, but it may also put you into a financial disaster. To benefit from refinancing, you should consider the following factors:
- Current interest rates: Check if interest rates have dropped compared to your current interest rate.
- Cost of refinancing: Costs such as closing, processing, and appraisal fees come into account when refinancing.
- Mortgage term: Try not to pay for more time than required, or you’ll end up paying more interest.
- Underwater loans: “Going underwater” is what happens if your mortgage value crosses the home’s value. To avoid this, know the value of your home.