3 financial advantages of mortgage refinancing
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Mortgage refinancing presents opportunities for cost savings and support for your financial goals. Typically, it involves re-borrowing a portion of the value of your home and existing mortgage payments you’ve already made.
When refinancing, the general rule of thumb is that your home must have at least 20 percent equity. Home equity is the difference between the amount you owe on your mortgage and your home’s current worth.
Even if your equity falls below 20 percent, refinancing your mortgage is still possible with a good credit rating. However, you might end up settling for a higher interest rate. It’s worth noting that refinancing isn’t simply about securing a lower interest rate.
When done correctly, mortgage refinancing can significantly influence your financial well-being. Learn about the financial advantages of refinancing your mortgage below.
1. Access to home equity
A common reason that motivates borrowers to refinance an existing mortgage is to use their home equity. It’s an asset that you can use as collateral when borrowing money to meet financial needs or goals. These include, but are not limited to, the following:
- Make renovations on an existing property
- Consolidating multiple debts
- Accessing cash for investment purposes
- Obtaining funds to make a significant purchase
2. Long-term savings
Refinancing your mortgage can reduce monthly payments by obtaining favorable and low-interest rates. This will allow you to save over the duration of the new loan and potentially realign your finances.
Even small savings accumulated over time can make a substantial positive difference in one’s financial situation in the long term. But depending on your refinancing agreement, the cost of your refinance can also be greater than the savings if you consider selling your home before the breakeven point.
3. Potential tax deductions
You can take advantage of several tax deductions when refinancing a mortgage loan. That means you can lower the overall amount you must pay in taxes.
But usually, the most considerable tax deduction you can qualify for is the mortgage interest rate you pay on both the original loan and the refinance. Likewise, you may deduct any fees you paid for points when you refinanced a mortgage.
It’s also possible to claim deductions if you refinance to access the existing equity in your home and those funds for investing opportunities. An experienced financial planner or tax professional plays a vital role in this process.
The bottom line
Refinancing your mortgage can enhance your overall financial situation. It can help you save money or bring you closer to your financial goals, particularly when securing better rates and terms. But there are also costs involved in the process.
When looking to refinance, consider your unique financial circumstances and goals. Don’t hesitate to seek help from a mortgage broker. They can assess the terms of your existing mortgage, enabling you to find mortgage deals that can result in significant cost savings.
