When you decide to refinance your mortgage, there’s actually quite a bit that you have to do. You are negotiating a completely new loan, so you have to go through the appraisal process again and pay for closing again. Depending on your situation, you may end up in a worse state than you are currently in with your mortgage. So why should you look into refinancing your mortgage?
Lower Interest Rate
One of the best ways that refinancing can help you is by getting you a lower interest rate. Because mortgages have such long payback periods — usually 30 years — even a very small drop in the interest rate can make a huge difference. For example, dropping your rate just a quarter of a point can save you thousands of dollars over the life of your loan, even after accounting for the closing costs you have to pay.
Shorten Your Loan Term
If interest rates drop far enough or you have gotten ahead in your mortgage payments, you may be able to refinance your mortgage with a loan that has a shorter term, without having much of an effect on your monthly payment. If you can move from a 30-year mortgage to a 15-year one, it will save you a tremendous amount of money. Not only will you be out of debt sooner, but you will also pay less interest for the life of your loan.
Lower Your Payment
Another way a refinance can help you is to lower your monthly mortgage payment. If you refinance your loan with a lower rate but keep the same loan duration, it will make your monthly payment smaller. That can make your monthly payment more manageable and free up money in your budget that can go toward other things, such as paying down other debts or saving for retirement.
Tapping into Equity
If you have significant equity in your home, either because your home has appreciated in price or because you have paid down your mortgage, a refinance can help you tap into it. Doing a cash-out refinance can allow you to use any equity above the 20 percent threshold as cash to make home improvements, pay down debt, or pay for college. You should talk to your mortgage company about the equity if you think this is a good option.
These are some of the many ways a mortgage refinance can help you. When considering a refinance, you must keep in mind things like closing costs and how it will affect your monthly mortgage payment. Those considerations will help determine whether a refinance is right for you.