You may not have considered it before, but there are many benefits to refinancing your home. Refinancing might be a great option if you’re looking to lower the interest rates on your mortgage or pay off your home faster. But there are actually have some benefits you may not have realized. Here’s a detailed look at the benefits to refinancing your home.
1. Lower the Interest Rate on Your Mortgage
Deciding upon an adjustable rate mortgage with a lower interest rate translates to lower monthly payments. Overall, you’ll end up paying less for your home, unless of course you cash out equity or shorten the loan term significantly. Making less monthly payments towards your mortgage will undoubtedly free up some extra money in your budget.
2. Build Equity Much Faster
If you can make higher than usual monthly payments and you’ve got a 30-year mortgage, switching to a 15-year mortgage allows you to build equity much faster without having to pay a lot of money each month. If you find it hard to justify the refinancing costs, you can always go with a bi-weekly payment option or pay extra every month. But if you’re not careful, it might put a dent in your wallet.
Some loans feature a pre-payment penalty. While paying extra early might make sense, leaving something small for the time near the end of a loan’s interest-only repayment period if it has a pre-payment penalty could help you avoid the extra charge.
3. Change the Loan Program Type
Although favored by many homeowners because of the low initial rates, adjustable rate mortgages are prone to fluctuations, making these loans extremely unpredictable and dangerous. As much as adjustable rate mortgages can save you some money in the short-term, taking out a fixed-rate loan for its added stability makes a lot of sense. Refinancing to a fixed-rate mortgage might be the best option if your payment is adjusting upwards because of a rate change or you prefer consolidating a home equity line of credit into your primary mortgage.
4. Managing Your Credit
You can also refinance to achieve better credit scores. If your credit score has improved due to timely mortgage payments, you can take advantage of the better credit by refinancing to a lower interest rate loan and reducing your payments. You can also use the proceeds of a cash-out refinance to pay off your credit cards debts, especially since mortgage rates are generally lower than credit card rates. In addition to much lower monthly payments, transferring the debt to your home loan could make the interest paid tax deductible. Check with a certified accountant to be sure.
5. Use the Equity in Your Home
A cash-out refinance loan allows you to use the equity built up in your home. Though cash-out refinance is one of the easiest ways to pay off credit card debts, it should be done only if you will not run up the same debts again. If you do, you’ll end up with similar credit card payments and more debt against your house. Through cash-out refinance, a homeowner will usually receive a lump sum at closing.
6. Pay off Your Loan Sooner
You could own your home that much sooner if you refinance from a 30-year mortgage to a 15-year mortgage. Although the monthly payments will go up, this is a good financial move if you can cover the difference. Paying off the home sooner saves you a significant amount of money in interest.
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