Refinancing a home mortgage can be a wise financial move for many homeowners. Refinancing can result in significant savings over the life of the loan, or can provide immediate cash to cover expenses or pay off debt. Your reasons for refinancing can be as unique as your own financial and budgetary needs. The advantages you experience during a refinance depend on your goals, as well as the type of loan and interest rate you choose. The following guidelines offer a review of some of the rewards you might reap as the result of a mortgage refinance.
Lower Rate
Lower interest rates mean lower monthly mortgage payments, and considering many home mortgages may be written for 15,-, 20-, 30-, or even 40-year terms, even the difference of a single percentage point in interest can add up to thousands of dollars in savings over time. Refinancing usually involves paying closing costs when the loan is finalized, costs which can add up to hundreds or even thousands of dollars. Be sure to review the closing costs you'll be paying to determine if the savings in interest will exceed your overall closing costs. A mortgage calculator can help you determine how much you'll actually save.
Loan Life
While the standard mortgage term--the length of time it takes before a mortgage is paid off--used to be 30 years, many homeowners opt for 15-year, 20-year or 40-year terms to suit their unique financial needs. Like lowering your interest rate, extending your mortgage term can result in lower monthly mortgage payments. On the other hand, shortening your term means higher monthly payments over a shorter period of time, a move that can significantly decrease the overall costs of your loan. In addition, shorter term loans often have lower rates than long-term mortgages, resulting in additional savings.
Different Types
If your income has changed or you're planning a move in a few years, switching to an adjustable-rate or interest-only loan may make sense for you. Offering lower monthly payments for a set period of time, these loans can be a good choice if you expect your income to increase within a few years and, because they are usually easier to qualify for than fixed-rate mortgages, can also be a good choice for those with less-than-perfect credit. On the other hand, if you currently have an ARM or an interest-only loan that is about to mature, resulting in higher monthly payments, you may benefit by switching to a fixed-rate mortgage to lock in a stable interest rate and terms.
Equity
While you've been paying your mortgage, your home has been paying you back in the form of equity--value built up over time, which occurs either as a result of a decrease in the mortgage amount or an increase in the value of your home--or both. Refinancing your mortgage is a great way to tap into that equity and take advantage of your home's accrued value. Called a "cash-out" refinance, many homeowners use the proceeds to make major home renovations, which increase the value of your home and its equity. Others use a cash-out refinance to pay off high-interest debts, improving their credit profile and reducing their monthly debt load in the process. And still others may use the loan proceeds to pay for a large purchase or expenditure, like a second home or a college education.
Tax Benefits
Remember, the interest you pay on your mortgage is 100 percent tax-deductible, which is why many financial advisers consider a home to be a major tax shelter.
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