Refinancing your home can help lower your monthly mortgage payments or get your home paid off faster – if executed properly. Refinancing won’t eliminate your debt, but it can restructure your debt to better suit your needs. If you are considering getting started on the process, it’s important to think about both the immediate and lasting impact. Check out the benefits of refinancing below so you can determine if this is the right decision for you.
In general, you have to have at least 20% equity in your home to be able to refinance. This means getting a new loan on your home with new terms. As with many financial decisions, it is a good idea to revisit your mortgage situation to be sure you have the best payment plan for you. You must consider your current mortgage size, the new mortgage you would be taking out, the current home value, the current interest rate of your loan, the new interest rate and the closing costs to determine whether refinancing is right for you.
The Instant Gratification
Refinancing can provide all sorts of immediate rewards. With better terms, if rates have dropped and/or if your credit has improved since your first mortgage agreement, you can lock in a lower interest rate. (You can check your credit scores for free on Credit.com.) This can mean lower monthly payments. In this scenario you have more money free to use on other things in your monthly budget. With cash-out refinancing, you can use your home equity to finance other things like college tuition or home renovation costs (though this isn’t always the best financial decision and worth researching before doing a cash-out refinance).
The Long-Term Savings
Obtaining a new mortgage can mean you pay off your mortgage faster if you refinance for a shorter-term loan. This can mean a mortgage or debt-free retirement or help you reach other financial goals. Further, less spent on interest over the life of your mortgage means greater long-term net worth. So, if you are able to secure a lower interest rate, you will pay more principal and less interest, meaning you shell out less money overall over time.
Deciding to refinance is an individual calculation that depends on your personal situation. It’s important run the numbers to see how much you will save and whether the fees you would have to pay are worth it.
More on Mortgages & Homebuying:
- Why You Should Check Your Credit Before Buying a Home
- How to Find & Choose a Mortgage Lender
- How to Refinance Your Home Loan With Bad Credit