Still wondering if you should refinance? There are four major reasons why you might want to refinance your home loan. With a refinance, you can lower your interest rate, change your loan terms, consolidate debt or take cash out of your home equity. Let’s take a look at each of these motives in more detail. You may be able to save thousands of dollars in interest, particularly if you can refinance to a lower interest rate. This is especially true if you keep the same term on your loan. For example, if you refinance a 15-year mortgage into another 15-year loan, a lower interest rate will automatically decrease your monthly mortgage payment. Remember to compare annual percentage rates (APRs) when you consider a refinance. Your APR includes both your base interest rate and any additional fees you must pay. The bigger the difference between your base rate and your APR, the more you’ll pay in closing costs when you finalize your refinance. Just be sure that you’re comparing apples to apples regarding the type of loan you’re considering when looking at APR.Lower Your Interest Rate
Change Your Loan Terms
You may also want to refinance to change the length of your loan term. For example, a 30-year mortgage term means that you must make monthly payments for 30 years until your loan matures. A refinance can allow you to make your loan’s term longer or shorter, depending on your needs.
Let’s take a closer look at the differences between refinancing to a longer versus a shorter loan term.
Refinance To A Longer Term
You might want to refinance to a longer term if you’re having trouble keeping up with your monthly mortgage payments. Going from a shorter term to a longer term gives you more time to pay back your loan and lowers your monthly payment. A longer term also means you’ll pay more in interest over time.
Refinance To A Shorter Term
You can also refinance to a shorter loan term to pay your mortgage off faster. When you take a shorter term, your monthly payment increases – but you save money on interest by paying off your loan faster. This can be a good option if you earn significantly more money now than you did when you first bought your house and can comfortably afford a higher monthly payment.
Do the math and make sure you’ll be able to make your payments before you opt for a shorter loan term.
Change Your Loan Type
With a mortgage refinance, you also can convert your current loan to a different loan type. This is especially useful if you originally had an adjustable-rate mortgage (ARM) and you’re looking to switch to a fixed-rate loan.
With an ARM, you start off with a low initial rate that eventually adjusts based on the terms of your loan. If your interest rate rises, you’re stuck making higher monthly payments than you were initially. If you’re looking for more stability in terms of your interest rate and monthly mortgage payments, you might consider refinancing to a fixed-rate mortgage.
Consolidate Debt
If you have a significant amount of higher-interest debt that you’re looking to pay off, you could consider a cash-out refinance. A cash-out refinance allows you to take money out of the equity you’ve built in your home. Every time you make a payment on your mortgage loan, or your home’s value rises, you build equity. Equity is the percentage of your home that you own. When you pay off your mortgage, you have 100% equity in your property.
With a cash-out refinance, you take on a loan that’s worth more than what you currently owe. In exchange, your lender gives you cash against the equity you’ve built. Many homeowners who take cash-out refinances use that cash to consolidate existing debts, like credit card and student loan debt.
Cash-Out Refinance Example
Say you have a home worth $150,000 and you’ve paid off $50,000. Your current mortgage balance is $100,000 and you have $50,000 worth of equity in your property. Let’s also say that you have $15,000 worth of credit card debt you need to pay off.
In a cash-out refi, you’d borrow $15,000 from your equity. You would accept a loan worth $115,000 from your lender. In exchange, your lender pays off your existing $100,000 loan and gives you $15,000 in cash. You use that $15,000 to clear your credit card debts and continue making monthly mortgage payments on your new mortgage.
Take Cash Out Against Your Home Equity
You don’t need to use the money from your cash-out refinance to pay off debt. Unlike other types of loans, you can use this money for almost anything. You can boost your savings or cover the cost of a home repair. The tax implications of a cash-out refinance may also allow you to make the interest tax deductible if you use the money for capital home improvements.
Overall, a cash-out refinance can be a great way to access your home equity at a low rate and use the cash for any reason.
