Based on this data from our mortgage calculator, you could save $156.83 a month by reducing your rate 1%. Consider these savings over 30 years, and you could save $56,458.80 in interest. While savings will vary based on a number of factors, the opportunity to save a significant amount of money is one of the most common reasons that homeowners refinance.
2.You Need To Change Your Loan Repayment Term
Homeowners might changetheir loan repayment term for multiple reasons. Here’s what you can expect with a longer loan term and a shorter loan term.
Longer Mortgage Term
Are you having trouble making monthly mortgage payments? A refinance can allow you to lengthen theterm of your mortgageand lower your monthly payments. For example, you can refinance a 15-year mortgage to a 30-year loan to lengthen the term of your loan and make a lower payment each month.
When you lengthen your mortgage term, you may get a slightly highermortgage interest rate. This is because lenders take inflation into account, and a longer mortgage term means you’ll likely pay more in interest over time. If you know your current payment schedule isn’t realistic for your household income, a refinance can free up more cash so you can invest, build an emergency fund or spend the money on other necessities.
Shorter Mortgage Term
You can also refinance your mortgage in the opposite direction, from a longer-term to ashorter-term mortgage. When you switch from a longer-term mortgage to a shorter-term one, you’ll likely enjoy lower interest rates and own 100% of your home sooner.Usually, switching to a shorter term also makes your monthly payments increase. Be sure you have enough stable income to cover your new payments before you sign up for a shorter term.
3.You Need Cash To Pay Off Debts
If you’ve made payments on your mortgage, you probably haveequity in your home. Equity is the difference between your home’sfair market valueand the amount you still owe to your lender. It’s possible to build equity in two ways: paying down your loan’s principal balance and the home experiencing an increase in value. Typically, if your loan is more than 5 years old, you’ve probably built a bit of equity in your investment just by making your regularly scheduled monthly payments.
Cash-Out Refinance For Debt
Acash-out refinanceallows you to take advantage of the equity you have in your home by replacing your current loan with a higher-value loan and taking out a portion of the equity you have.
You might seek acash-out refinance to pay off other debt. If you have higher-interest debts spread over multiple accounts, you can use a cash-out refinance to consolidate your debts to a lower interest rate, pay off each account and transition to one monthly payment. Consolidation can help you keep a better record of what you owe and reduce instances of missed payments, late fees and overdraft charges.
4.You Want To Make Home Improvements Or Renovate
From fixing a broken HVAC system to replacing the pink linoleum in the bathroom, you might need torefinance to invest in home improvementsat some point or another. Using home equity can be better than taking out a personal loan or putting charges on a credit card because cash-out refinances usually have a lower interest rate than both.
Cash-Out Refinance For Renovations
Though you can do virtually anything you want with the money from a cash-out refinance, it’s important to remember your refinance is still a loan. It’s a good idea to get estimates from contractors or repair professionals before you close on your refinance. This will lessen the chance you take out too much money or take out too little and have another bill after the job is finished.
5.You Want To Allocate More To Retirement Savings
One of the most powerful tools you can take advantage of when saving for retirement is compounding interest. The earlier you start to invest and save, the more years you have to accumulate interest on your investments before you retire.
Cash-Out Refinance For Investing
If you have equity sitting in your home but you haven’t maxed out your annual retirement contribution limits, you may end up making more money over time by taking a cash-out refinance and investing the difference.
You can also use the money from a cash-out refinance to invest in your property. Whether you want to add a new bathroom, spruce up your paint or install a privacy fence, you’re only limited by your imagination. Upgrades can bring in more money when you want to sell your house by increasing your home’s value and curb appeal, both of which can help you secure a higher final closing price.
6.You Want To Convert An ARM To A Fixed-Rate Mortgage
Anadjustable-rate mortgage (ARM)generally offers borrowers a lower interest rate at the beginning of the loan. But, after a fixed period (usually 5, 7 or 10 years), the interest rate has the potential to fluctuate – and not always in the borrower’s favor. For this reason, some homeowners will opt torefinance their ARMto a fixed-rate mortgage, which eliminates this fluctuation in interest rate.
It’s also possible to refinance afixed-rate mortgageto an ARM. This involves some risk, but it could be a smart option if interest rates are falling. Or, it may be wise if you plan to sell your home before the initial period of fixed (generally lower) interest ends.
