When you refinance your home loan, you take out a new mortgage loan to pay off your existing one (or get rid of it completely). There are many benefits when you refinance your home loan, but only if you choose the right time to do so and make the right decisions. That's why we've put together this list of seven benefits to refinance your home loan now to help you decide whether it's the right move for you or not to help with your decision.
1) Save on interest
You could save a good chunk of money by refinancing, not to mention you'll start saving immediately. Think how much interest you'll save over time if you can reduce your interest rate by 2 or 3 percent. At just 1.25 percent more than a 30-year fixed-rate mortgage, for example, a 15-year fixed mortgage will save about $200 per month on principal and interest payments—not to mention thousands over time. If that's not enough reason to refinance, we don't know!
2) Have lower monthly payments
The most significant benefit of refinancing your home loan or mortgage through a dependable financial service provider is that it allows you to seek much lower monthly payments. Lower monthly payments mean more cash in your pocket. When you refinance your home loan could let you pay off other debts, save more money or even start a business. While you may think refinancing will cost you money, it may be an opportunity for lower interest rates and hundreds of monthly savings.
If you are interested in lowering your mortgage payment and want to see if refinancing might work, talk with a mortgage lender about all your options. There's a good chance that there's something out there that can reduce your monthly costs without hurting your credit score.
3) Get cash out
One of the biggest perks of refinancing is tapping into your home's equity. Most Americans have $20,000 to $50,000 in equity from years of homeownership. This cashout loan allows you to borrow against your home's value with a lower interest rate than what you originally paid on your mortgage. Use it for renovations, college tuition, or a new car—whatever makes sense for your situation and goals. Or use it as spending money during retirement instead of dipping into Social Security checks.
4) Pay off your mortgage faster
Although refinancing is commonly associated with lower monthly payments, it's also a solution because it can be used to pay a mortgage sooner. In addition, saving thousands in interest over time is a massive perk of refinancing your home loan. But what does it mean exactly to refinance? It means paying off an existing loan with a new one for less money and removing hidden fees.
To find out whether refinancing makes sense for you, run a personal finance check-up first. First, calculate your savings over several years with a lower interest rate. Then, estimate how quickly you could pay off your mortgage by putting that extra cash toward principal each month.
5) Fix your credit score
Before applying for a home loan, check your credit score. It's free, takes only a few minutes, and several sites offer credit scores. Some will even tell you how negative items on your report will affect your credit score. Refinancing will initially hurt your credit score but might help in the long run. Refinancing can significantly lower your debt and monthly payment, and lenders like to see both.
Your score will typically dip a few points, but it can bounce back within a few months. So if you find issues that can be resolved quickly—e.g., if you're behind on a couple of payments or something similar—take care of those immediately to see an instant boost in your credit score. Otherwise, focus on paying off existing debt, which can be one of the fastest ways to improve your financial situation and increase your chances of obtaining a lower interest rate with good terms.
7) Free up equity in your property
When you refinance your home loan, you are using your home as collateral, and you can take out a loan for other purposes, such as buying or building another property or starting a new business. This is known as equity release. Your amount will depend on your property's value and how much equity you want to access.
Bear in mind that withdrawing equity may increase your monthly repayments. However, suppose it enables you to buy or build an additional property. In that case, you might end up with a more significant amount of total income from rent than before - effectively increasing your wealth over time. You might also be able to pay off existing debts more quickly by taking out smaller loans (over which you have more control) rather than one big lump sum with variable interest rates.
6) Gain flexibility over your payment schedule
Is your home taking up a large share of your budget every month? Are you considering refinancing your mortgage to get a lower interest rate and shorten your loan term but aren't sure if it's worth it? A refinance may relieve some pressure on your monthly budget by allowing you to repay your loan sooner. Plus, refinancing can help you adjust how much you owe so that you don't have to make such high monthly payments—and thus spend less on interest.
7) Refinancing if You Have a Reverse Mortgage
- Increased loan proceeds: If the value of the home has increased significantly since the original reverse mortgage was taken out, refinancing may allow borrowers to access additional funds. This can provide extra financial resources to cover various expenses, such as home improvements, healthcare costs, or daily living expenses.
- Lower interest rates: If market interest rates have dropped since the original reverse mortgage, refinancing may allow borrowers to secure a lower interest rate, reducing the overall cost of the loan and preserving more of their home equity over time.
- Access to a new loan program: Refinancing a reverse mortgage can give borrowers the opportunity to switch to a new loan program that may better suit their needs or offer additional benefits, such as lower fees, a fixed interest rate, or a larger line of credit.
When refinancing your home loan, it's easy to fall prey to false advertising. However, refinancing your home loan will help you pay less monthly on your mortgage. Your situation should determine whether or not you refinance your mortgage—not simply whether interest rates are rising or falling.
Home finance can help you handle your loan repayment experience on your terms by allowing making the necessary adjustments by reading this list of benefits and being thoughtful about how much money you borrow (and what words); refinancing could be an excellent choice for many people and for you to take on new journey!