While refinancing can seem like an intimidating process, it is a very common practice used by mortgage holders and homeowners alike to help them save money on their current loans.
When a homeowner chooses to refinance their loan, it means they are choosing to take out a new loan with more favorable terms than their original loan. Usually, the new loan will help homeowners save money by either shortening the length of the loan, reducing monthly loan payments, or consolidating other debts to help pay off the loan.
Why Refinancing Could Be Useful for You
Lower monthly payments
The most common way refinancing helps homeowners save money is by lowering their monthly loan payments. This is usually accomplished by either lowering the interest rate on a loan, or by extending the term of the loan.
Lower interest rates
When homeowners refinance at a lower interest rate at the same term, it reduces the amount of money in interest that they owe over the life of the loan.
Shorter loan terms
By refinancing with a shorter loan term, monthly payments could become higher, but the loan itself will be paid off quicker. However, these aren't the only benefits to shortening a loan’s term. If the shorter-term loan also has a lower interest rate, homeowners will spend even less in the long run despite the higher payments.
Replace an adjustable-rate loan with a fixed-rate loan
Initially, adjustable-rate loans can be attractive to home buyers because they tend to have very low interest rates when they’re first taken out. However, the rate on an adjustable rate loan could increase over time. Using refinancing to switch to a new fixed-rate loan can give homeowners the advantage of predictable monthly payments and an interest rate that won't change during the payback period.
Get cash for a new kitchen, medical expenses, paying off high interest credit card debt, etc.
A cash-out refinance allows homeowners to tap into the equity of the asset they are securing their loan with, and that asset is usually their own home.
A cash-out refinance works like this. Let's say your home currently has a market value of $250,000, and you have $100,000 left to pay on your existing mortgage. The difference between your home's value and what you owe on your mortgage is your home equity. A cash-out refinance gives you access to some, or all, of your home’s $150,000 in equity without needing to sell your home.
When to Consider Refinancing
The interest rate on a loan is largely dependent on market conditions and a person’s individual financial situation. It could be a good time to refinance if your credit has improved, your income has increased, or any other debt balances have gone down.
Falling interest rates in the market usually indicate that it’s a good time to refinance. For instance, at the time this article was published, the United States is currently experiencing a period of historically low mortgage rates. For many homeowners, refinancing now could be an opportunity to get a lower interest rate on their current home loan.