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What mortgage refinancing can do for you.
Mortgage refinancing can help you reach financial goals faster. Every financial situation is unique, but in many cases finding the right way to refinance your mortgage can be a smart choice for your financial life. Let’s look at some of the popular reasons why people refinance a mortgage and the circumstances that make each one a smart choice.
Mortgage interest rates are at historic lows. Depending on when you bought your home, you may be able to decrease your interest rate significantly. A lower interest rate can reduce your monthly mortgage payments, so you save money every month. At the same time, you can save significant money in interest charges over the life of your loan.
Let’s say you have a $300,000 mortgage at a 6% APR (annual percentage rate). The payments on a 30-year mortgage would be nearly $1,800 and you'd pay nearly $350,000 in interest charges over the life of the loan.
At 4% APR, just 2 percentage points lower, the same mortgage would have monthly payments of approximately $1,430. The lifetime interest charges would only be approximately $215,000.
Refinancing while interest rates are low can improve your budget and save you significant money in total interest charges
Better terms on your mortgage can give you the financial stability you need.
For example, if you’ve taken out an adjustable-rate mortgage, but you’ve decided to stay in the home, variable interest rates may not offer the stability you need. Moving to a fixed-rate mortgage while rates are low could be a smart move.
You may also need to change the length of your mortgage to match your goals. A shorter-term mortgage can help you pay off your home in full before you retire, ensuring stability in your golden years. A longer term can ensure you keep up with your mortgage payments if you've been facing income uncertainty in this new economy.
FHA loans, backed by the Federal Housing Administration, require you to pay Private Mortgage Insurance (PMI). This is an added monthly payment that protects the lender in case you default on the loan.
PMI is required on all FHA loans, regardless of how much equity you have in the home. Refinancing an FHA loan to a conventional loan means you can eliminate this cost.
Your home is your greatest asset, and you can use some of that asset to improve its value. Home renovations are one of the best uses possible for home equity because you increase the value of that very property.
Cash-out refinancing and other equity options like it make it easy to tap the equity in your home for home improvements. You can fund multiple projects at once and have funds to cover the budget. Even contractors get peace of mind when they know that a homeowner has accessed their equity to fund the project they’re asking for.
Credit cards and other high-interest debt can be tough to payoff, especially if you have high balances spread across multiple cards. Consolidating this type of debt can make it much easier to pay off because you have fewer bills to worry about and you can focus on paying off the debt you owe, rather than all those interest charges.
While you can consolidate debt with unsecured personal loans, the interest rate will typically be much higher than what you can get through a secured mortgage product. Thus, if you use a cash-out refinance and use some of the funds to pay off credit cards and other debts, you can get the lowest possible interest rate applied to that debt.
Starting a business is a big step, but it can also be expensive for you on a personal level, particularly during the startup phase. If your business isn’t big enough to qualify for financing on its own, you often need to rely on your personal finances to cover startup costs. Rather than putting everything on a high-interest rate credit card, cashing out home equity can provide you with the cash you need to get your business off the ground.
Whether you're financing your children's education or going back to school to advance your career, student loans can become a huge burden. Rather than facing the higher interest rates that you'll find with federal student loans and even private loans, you may want to consider using home equity to make financing your education more affordable.
You can use home equity to minimize the number of costly student loans that you or your children need to take out. That means fewer bills to worry about after graduation, and only one low-interest debt to pay off.
If you're behind on your retirement investment strategy, your home's equity may provide the means to jumpstart your retirement plan. Cash-out refinancing or another home equity lending option can give you the funds you need to rapidly increase your retirement savings.
Given that the average savings rate on an employer-sponsored 401(k) plan ranges from 7-10%, you can get better growth investing your equity than the rate you will have for cashing it out. It's always recommended to talk to a financial advisor when making decisions about your retirement strategy, but when you need to kickstart your retirement savings, refinancing your mortgage may be the right option.
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Since this loan is a first mortgage instead of a second, it offers lower interest rates than home equity loans and HELOCs. First mortgages have some of the lowest rates possible on consumer financing, so it’s a cost-effective way to get cash. Even better, if you refinance at the right time, you can lower the interest rate compared to your original mortgage. This way, you save money as you pay off your home.
Mortgage interest is often tax-deductible, meaning you can lower your tax liability each year by deducting the interest you’ve paid. If you’re using part of the money you cash out to pay off other debts, you get a tax break in addition to lower APR. No other debt offers this kind of interest deduction.
With a mortgage, you know what to expect. You enjoy fixed monthly payments because it’s an installment loan. This offers advantages over financing like HELOCs, where the payments increase significantly after the 10-year draw period.
If you use the equity you receive to pay off things like credit card debt, you will decrease your credit utilization ratio. This measures the amount of credit card debt you have relative to your total limit. Paying off debt with equity may lead to a credit score boost. The trick is not to run up new balances!
Unlike basic refinancing where your balance remains the same, a cash-out refinance modifies your mortgage. The principal is higher because it includes the equity you cashed out. So you have more mortgage debt to pay off. If you are nearing retirement, this can put you at a disadvantage. Owning your home free and clear as you retire gives you more security.
Refinancing is not cheap. Closing costs amount to 2-5% of the new mortgage. If you get a $200,000 mortgage, the costs may total up from $4,000 to $10,000. Make sure that the equity you’re taking out AND the interest rate savings you may get are worth that cost.
If you borrow up to 90% of your equity (or anything over 80%) then you will need to pay private mortgage insurance (PMI). The lender will require this until you make enough payments to reach 80% CLTV.
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Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Consectetur adipiscing elit.
Since this loan is a first mortgage instead of a second, it offers lower interest rates than home equity loans and HELOCs. First mortgages have some of the lowest rates possible on consumer financing, so it’s a cost-effective way to get cash. Even better, if you refinance at the right time, you can lower the interest rate compared to your original mortgage. This way, you save money as you pay off your home.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique.
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