If your budget is always a bit tight at the end of every month, refinancing your home loan can help you improve your cashflow. You could refinance mortgage to reduce your monthly payments, while getting a lower interest rate, eliminating private mortgage insurance (PMI), and/or refinancing into a longer-term loan.
The benefits to refinancing into a shorter-term loan include building up your equity more quickly, paying less interest overthe life of your loan, and having a lower interest rate than you would with a longer-term loan. If you are looking to lower your monthly payments, refinancing to a lower interest rate or lengthening your loan are two ways you can do that. Switching to a loan with a lower interest rate, consolidating other high-interest debt, and changing your loan terms can all have the potential to reduce your monthly payments.
When interest rates drop, homeowners sometimes get a chance to refinance their existing loan into a different one, whichwith little or no change in monthly payments, has a considerably shorter term. If you want to get out of the subprime debtfaster, you may want to refinance into a shorter-term loan. For instance, a 15-year refinance loan is a good option if youwould like to receive a lower interest rate in order to pay down the mortgage faster and get rid of the debt.
If your credit score has improved since taking out the mortgage, you may qualify for a lower rate or better terms with arefinance. If rates have fallen since you took out your previous loan, you may be able to refinance to a lower-rate loan.
When you refinance, you may be able to change your current investment home loan from an adjustable-rate to a fixed-rate loan, or vice versa.
Refinancing into a lower-rate mortgage also can free up a little bit of money, so that you will have some extra emergency funds available should the need arise. If needed, you can unlock this equity at retirement through a cash-out refinance, a home equity loan, or a reverse mortgage.
If you are carrying credit card balances or have other loans with relatively high interest rates, you could take a cash-outrefinance and use your home equity to swap out those debts for mortgage debt that is less expensive. A cash-out refinance is when you take advantage of home equity and receive cash back to cover something else, such as paying off debts (high-interest credit cards, student loans, medical bills) or building up cash reserves.
If you can lower your mortgage interest rate, but also take money out of the house to pay bills or make home improvements, a cash-out refinance may make sense.
By moving your credit card debt onto your mortgage, you can potentially save a substantial amount over the long run due to lower interest rates. Reducing credit card debt and making regular, on-time payments on your mortgage should help to boost your credit score. Paying down the interest on consumer debt, like credit cards and personal loans, is also a good way to build up savings over the long run.
Whatever the reason, if you are eligible for an interest rate lower than the one your mortgage is currently paying, you could potentially save thousands over the life of your loan. A 100-point improvement in your credit score can enable you to lower your mortgage rate by nearly one full percentage point, saving you tens of thousands of dollars in interest over the life of your loan. If you are able to afford higher monthly payments due to a rise in your income, you may be able to refinance to a shorter term (such as from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage) in order to pay down the loan more quickly, saving thousands of dollars in interest payments over the life of the loan.
Shortening your loan length can raise your monthly mortgage payments but will help pay for itself in the long run by leaving less money out for loan interest. While you will be paying less interest overall, you will have higher mortgage payments and less leeway in your monthly budget. Interest will be one of your closing costs on a new loan, and you are basically just moving the missed payments forward until your new mortgage is over.
You are going to pay off your refinancing either as higher interest rates (to offset the lender paying for closing costs) orhigher loan balances (by rolling the closing costs into your new loan). Keep in mind, however, that taking cash out will cost you more interest over the life of your new loan, but not necessarily more than the other financing options will cost you. If you have a house with a less-than-20-percent down payment and a Federal Housing Administration loan, the higher equity could get you closer to being able to refinance your way out of an FHA loan, so that you could eliminate your monthly insurance payments.
Instead of paying lifelong mortgage insurance on an FHA loan, you could refinance into a traditional loan instead. If yourefinance into a lower interest rate and reduce your loan term a few years, for a refi that is 15 years or 20 years, you could eliminate your private mortgage insurance, or PMI, and still potentially get money out of the house. Switching from afixed-rate loan to an ARM-which typically has lower monthly payments than a fixed-term mortgage-can be a smart financial strategy if interest rates are falling, particularly for homeowners who are not playing for staying in their homes more than a few years.
