A mortgage is a very powerful financial tool that can help a person in many different situations, which means that finding the best time to take advantage of refinancing and the benefits of refinancing your mortgage are crucial. There are many benefits to refinancing a mortgage such as changing the term of your loan, changing the type of your loan, cashing out equity, managing your credit, and lowering your interest rate. Below we talk about 5 benefits of refinancing your mortgage!
Changing the Term of Your Mortgage
There are many reasons why a person may want to change the term of their loan. For instance, the homeowner may have just paid off their car, or inherited some money, or received a bonus at work. If the homeowner has experienced an important event in their life like this and they are planning to own their home into retirement, refinancing their loan to a shorter amortization period may be a very good more financially. Their monthly payments may rise, but they will have extra cash to help cover the costs. This means that they will be able to pay off their home sooner, and the interest that they have saved over the life of the mortgage could be significant.
Changing the Type of Your Loan
There are various ways that someone can choose the change the type of their loan. Some borrowers may have mortgage insurance, which is a fee that enables mortgage brokers to give a homeowner a lower down payment by you giving them a form of protection. If a borrower only makes the minimum down payment, then the mortgage insurance payments will stay around for the life of the loan.
If a borrower has more than 20% equity and their credit score is in good shape, they can lose the higher mortgage payments by refinancing to a conventional loan. Another reason a borrower may choose to change the type of their loan is by moving from a variable rate to a fixed rate. A homeowner may choose to have a variable rate in the beginning because of low or falling interest rates. However, if those interest rates begin to rise, a homeowner may choose to switch to a fixed rate mortgage for the added stability. For more information on fixed and variable mortgages, check out our previous post about it here.
Cashing out Equity
Each time a homeowner makes a payment on their house, they gain a little bit more equity and come closer to paying off their mortgage. This can be used to a homeowner’s advantage by cashing out a portion of the existing equity on the home and putting it towards other expenses. A common reason a homeowner may choose to do a cash-out refinance is to help consolidate debt. Remember those holiday debts you had? You can pay off those credit cards by taking cash out of your home to help pay off those balances.
Achieving Better Credit Scores
Some borrowers may be looking to achieve better credit scores. This can be done by refinancing their mortgage. For instance, a borrower’s credit score may have gotten better because they have been making their mortgage payments on time. Therefore, the homeowner can take advantage of their improved credit score and refinance to a loan with a lower interest rate and lower monthly payments. When homeowners also consolidate their debt and use equity to pay off debts, they will also be helping their credit score. There are so many ways that refinancing your mortgage can help out your credit score!
Lowering Your Interest Rate
Lower interest rates may be beneficial to homeowners if they can get a lower interest rate and keep the same term of the loan. This means that if everything remains constant, like the term of the loan, the rate will go down. Just getting an interest rate that is one percent lower can save homeowners tons of money on their monthly payments. Homeowners considering this option should take into account that they may have to pay a penalty fee for breaking their mortgage to refinance. This may end up benefiting homeowners a lot in the long run and save them a profuse amount of money. Moreover, if interest rates are on the rise and homeowners want to lock in their rate, they can refinance from a variable rate to a fixed rate.
If you are looking for more information on a mortgage refinance and whether it will benefit your current situation, feel free to get in touch with us here.