5 reasons to refinance your home loan
Top 5 Reasons to Refinance Your Mortgage
When you refinance your home loan, you swap your current mortgage for a new one, usually with different loan terms. These new terms could help make your mortgage more manageable or save you money in the long run.
You may consider refinancing for a variety of reasons, but here are the five most common reasons to refinance.
1. To lower your mortgage interest rate
Borrowers can choose to refinance their mortgage to take advantage of low mortgage interest rate, especially if rates are lower than when the borrower originally took out the loan. Your interest rate affects the size of your monthly mortgage payment and how much you will pay over the life of your loan. The higher your rate, the higher your monthly payment will be and the more interest you will end up paying.
So, refinancing at a lower interest rate can help lower your monthly payment and save you money in the long run. Plus, it can help you build up equity in your home faster. Your principal increases when you repay main balance on your mortgage. If you pay more for your principal each month (because you don’t have to pay as much interest), you increase your home equity faster.
2. To modify the duration of your loan
If interest rates are very low, borrowers may have the option of refinancing a mortgage with a shorter term. term of the loan without drastically changing the amount of their monthly payment. But even if you don’t, you might want to refinance to change your loan repayment term. Let’s see what happens when you shorten or extend the term of your mortgage.
Shorten the term of the loan
Refinancing a shorter-term mortgage (for example, going from a 30-year mortgage to a 15-year mortgage) can help pay off your mortgage sooner, which means you’ll own your home sooner and can free up funds for other financial goals. Paying off your loan over a shorter term can also help you save money on interest during the term of the loan.
On the other hand, switching to a shorter-term loan often increases the amount of your monthly payments. If you’re having trouble making your mortgage payments as they are, shortening the term of the loan may not be the best option.
Extend the term of the loan
You may want to refinance a longer-term mortgage and lower monthly mortgage payments. Extending the term of your loan reduces the amount of money you pay each month because you extend the time you have to pay off the loan.
Your monthly payments will be lower on a longer-term mortgage, but you’ll end up paying more interest over time. In addition, it will take you longer to fully own your property.
However, if you are having financial difficulty with your payments, it is often best to be proactive in reviewing your terms to avoid foreclosure. Keep in mind that refinancing to reduce monthly payments can also free up funds to pay off other debts, build up your savings account, or invest.
3. To access the equity in your property
Refinance with a cash refinance allows you to use the equity you have accumulated in your home. Your equity is equal to the current value of your home minus the amount you still owe your lender. A cash refinance replaces your current mortgage with a larger loan amount than you previously owed on the home, and you take a percentage of your home equity cash to use to consolidate debt, pay for home improvements, college, retirement, a savings fund, or make another investment of your choice.