What is refinancing your mortgage? It’s when you replace your current home loan with a new home loan. It’s really as simple as that!
Refinancing your loan will be the right financial move if it helps you lower bill payments and save money in the long run.
Sometimes people refinance their mortgages because it’s the best way they can “get money” during a difficult financial point in their lives.
Whatever reason you may be considering refinancing, it’s always important to take some time to think about the pro’s and con’s of it, and if it’s the right financial move.
Below are the top 7 reasons why you should consider refinancing your home loan.
Get a lower interest rate
The number one reason why home owners refinance their mortgages is to save money in the form of getting a lower interest rate.
When you refinance your loan, you will get a new interest rate. The interest rate you receive depends on how good your credit score is and also what current interest rates are right now.
If current interest rates are favorable, or have gone down, refinancing your mortgage may make sense. Also, if your current home loan has a high interest rate, or you have increased your credit score sufficiently since you received your home loan, you could benefit from refinancing.
In all cases, you save money by obtaining a lower interest rate. A general rule of thumb is that if you can lower your interest rate by at least 1%, you can save money. If you can lower your interest rate by a few percentage points or more (like 8% to 5%), you will likely save tens of thousands of dollars on loan interest payments over the life of your loan (assuming you’ve taken out a conventional 30 year mortgage).
To check for the lowest interest rate, you can use this comparison website where lenders “compete” to refinance your loan.
To pay off bad debts
If you’ve built up some equity in your home, you can use this equity as cash. What happens is you refinance your loan for more than the loan value of your mortgage. This larger loan will include other debts you’ve bundled into your home loan.
What you’re doing is consolidating your debt under one loan payment (your home loan). This can be a good or bad idea. Generally, if you are consolidating debt that have high interest rates, like credit card debt (which can have interest rates of 20% for example), you can save money by refinancing since home loan interest rates will almost certainly be lower.
Just make sure to employ better spending habits after you’ve “gotten rid of” these other debts. It now free’s up room on your credit cards or lines of credit or whatever else revolving credit you may have consolidated. Resist the temptation to use it if you don’t actually need to.
There are many types of professional people you can speak to in order to get advice on paying off debt, from a banking advisor to a loan advisor. It may pay to speak to several professionals before deciding on how to move forward.
To shorten the years you need to pay down your loan
Home owners may want to shorten the term of their home loans for various reasons. The biggest one being that interest rates are currently low, and you can refinance your loan to a shorter term with the lower interest rate, and sometimes have your monthly mortgage payments stay relatively the same.
Other major reasons include getting a new job or raise, or you simply want to be debt free sooner and have the means to pay your home off quicker.
In any case, shortening the term of your loan means you will pay less money overall because you will be borrowing money for a shorter period of time. The cost to take out a mortgage over the life of the loan can easily exceed $100,000. Paying it down as quick as possible is a very smart move if you financially have the means.
If you need money or to pay for expenses
You can also do what’s called a cash out refinance. Which basically means taking money out of your home. You will need to have built equity in your home in order to qualify for this.
Be careful with this one. Because what you’re really doing is extending the time of your loan in order to get cash. It may make sense if you are financially struggling and this is a means to get cash to help you get over this difficult time.
But if you’re doing a cash out refinance to buy a vehicle or go on expensive vacations, there is a real cost to this financially as you are essentially going more into debt to fund these perhaps “non essential” purchases. So think carefully about this if that’s the case.
Change the rate type of your mortgage
Your mortgage interest rate can be variable or fixed. With a variable interest rate, your interest rate will change with economic change. A fixed interest rate means your interest rate will not change no matter what happens with the economy.
There are benefits and drawbacks of both. However, you may want to switch to a variable interest rate or vice versa. If you feel interest rates are going to increase, you may want to change to a fixed rate and lock in a lower rate today. Conversely, if you feel interest rates will drop in the future, you may want to switch to a variable interest rate to take advantage of lowering interest rates.
In either cases, a mortgage refinance takes place with your new type of interest rate. This is a smart move to do if you keep in touch with what’s going on. Also, the government can make announcements on what they plan to do with interest rates, which can help you make this type of decision.
To lower monthly payments
It may make sense to lower monthly payments on your home loan right now.
Whether you’re simply taking advantage of lower interest rates in the market right now, or you are in financial difficulty and lowering your monthly mortgage payments would give you some much needed bill relief, refinancing your mortgage is an option to consider.
How to refinance your mortgage
The most important thing is to get many quotes from many lenders. There are more than enough lenders willing to help you refinance. You want to make sure you get the best rates. To do that, you need to compare rates across many lenders.
You can compare refinance mortgage rates online with a comparison website like this one here.