6 benefits of home loan refinancing
Home loan refinancing involves getting a new mortgage to pay off an existing one. It can lower your monthly repayments by increasing your loan term or reducing your interest rate. Refinancing can also reduce your long-term interest costs through a lower mortgage rate, a shorter loan term, or both. Additionally, home loan refinancing can help you get rid of mortgage insurance.
When deciding whether to refinance or not, consider closing costs like appraisal fee, origination fee, credit report fee, and title insurance fee to help you calculate the break-even point. Below are the benefits of home loan refinancing.
1. Lower interest rates
Refinancing your property gets you a lower interest rate on your existing loan, which not only reduces your monthly repayments but also increases the rate at which you build your home equity. Paying interest on a smaller principal amount can also reduce your monthly repayment but over a longer period. Additionally, having a higher score contributes to better interest rates.
2. Shorter loan terms
If you begin with a 30-year mortgage, then refinancing reduces it to a 15-year fixed-rate mortgage. This allows you to pay off your mortgage much faster while saving money in interest rates over the loan term. 15-year loan mortgage rates are lower than the 30-year ones, allowing you to shorten your loan term without a huge increase in your monthly repayments.
3. Private mortgage insurance (PMI) elimination
Homebuyers who use a conventional mortgage with a less than 20% down payment must acquire private mortgage insurance to protect the lender against elevated risks. However, not all mortgages with less than a 20% down payment need a PMI. Refinancing can only help get rid of private mortgage insurance if your new mortgage balance is less than 80% of the home’s value. Alternatively, once your home gets to 20% equity, you may refinance to eliminate PMI. This helps save money that you can add to your savings, invest, or pay off debts.
4. It helps you pay off major expenses
Home equity can be built by increasing your home’s value, mortgage payments, or both. To access the equity you’ve built, you can do a cash-out refinance, which can be up to 80% of your home’s value so you can pay off any major expenses you may have, such as a high-interest debt like a credit card, financing home repairs and improvements, medical bills, and more.
5. It locks in a fixed interest rate
Adjustable-rate mortgages (ARMs) start with lower rates than fixed-rate mortgages. However, periodic adjustments may result in increased ARMs. Refinancing helps you convert to a fixed rate with lower interest rates, eliminating concerns for future rate hikes.
6. Debt consolidation
Refinancing your home loan can help consolidate your debts. Since interest rates on mortgages are likely lower than the rates on other debts you may have, consolidating could result in lower overall monthly repayments. However, this could turn your home loan into long-term debt. This is why before you consider consolidating debts into your home loan, calculate to determine how much you can save in the long run.
Refinancing can be a great financial decision to help build your home equity faster, shorten your loan term, or reduce your mortgage payment. Before you decide to refinance, consider your financial situation and determine how much you can save with home loan refinancing.