Refinancing is a smart way to lower your monthly mortgage payments, reduce your interest rates, convert your home equity into cash, or switch from an adjustable-rate mortgage to a fixed-rate mortgage. It basically replaces your existing mortgage with a new loan that’s easier on the wallet.
The process of refinancing works just like the process used while applying for the original mortgage: researching loan options, collecting financial documents, and submitting an application for approval.
Its Benefits
Lower monthly payments
The average homeowner can save $160 or more per month with refinancing. The funds saved can go towards paying other debts or expenses or towards paying off the refinanced loan sooner.
Removing private mortgage insurance
The homeowners that have enough property appreciation or have paid off the principal will not have to pay mortgage insurance. This serves towards lowering the monthly payment.
Reducing loan term
If, say, a homeowner has taken out a 30-year mortgage in the early stage of their career, they can pay it off sooner by reducing the loan term. Getting debt-free earlier than expected is always a bonus.
Switching to a fixed-rate loan
The interest rate change can make payments go up or down in an adjustable-rate mortgage. But a fixed-rate loan has reliable and stable monthly payments. This offers homeowners stability that their payment will never change.
Consolidating the first mortgage and home equity line of credit
If these payments are combined into one, homeowners can simplify finances and focus on one debt only. HELOCs tend to have adjustable rates, so refinancing into a fixed-rate loan may offer savings in the long run.
Converting home equity into cash
If the value of your home has risen, you may have enough equity to take out a cash-out refinance. This cash can be used for financing home improvements, paying off debts, or funding large purchases.
Of course, refinancing isn’t without risks. It is only a good option if the new interest rate is lower than the current one and the total savings amount is higher than the cost to refinance. There are several online calculators available for you to work out what your new monthly mortgage payment could be if you were to opt for refinancing.
