Paying off an existing loan with another loan is called refinancing. This helps save money and secure better loan terms. There are many reasons for home buyers to refinance. They may want lower interest rates or tap into their home’s equity to access cash. Below we’ve listed several scenarios where refinancing a mortgage is beneficial. Read on to know more.
To Secure a Lower Interest Rate
Getting lower interest rates is one of the primary reasons homeowners refinance their mortgages. If interest rates have significantly dropped since you obtained your mortgage, refinancing can lower your monthly payments. This can potentially result in savings of thousands of dollars throughout the loan’s duration.
To Convert to An ARM or Fixed-Rate Mortgage
Adjustable-rate mortgages (ARMs) generally start with a lower interest rate that adjusts over time. Refinancing into a fixed-rate mortgage may be beneficial if you currently have an ARM and want to lock in a stable rate. Refinancing to an ARM from a fixed-rate mortgage may provide initial cost savings for buyers who wish to stay in their home for a shorter period.
To Shorten the Loan’s Term
If your financial situation has improved or you wish to pay off your mortgage faster, consider refinancing to a shorter loan term. For example, if you decide to refinance from a 30-year to a 15-year mortgage, you may benefit from a lower interest rate and save significant interest over time.
To Tap Into Equity or Consolidate Debt
Refinancing allows homeowners access to the equity in their homes. It also lets them consolidate high-interest debt. Refinancing for a higher loan amount means you can receive a cash-out option. This can be used for home improvements, education expenses, or debt consolidation. This approach may help streamline your finances and potentially save on interest payments.
Tips
Carefully evaluate the costs associated with refinancing, such as closing costs and fees. Calculate the breakeven point to determine how long you will take to recoup these costs through the savings obtained from refinancing.
Refinancing usually costs 3% to 6% of the loan’s principal. It may take years to recoup this cost with the savings generated from refinancing. If one is not planning on staying in their home for long, then refinancing costs may not be worth it.
