Oftentimes, the process of securing a mortgage and buying a house is quite tedious. As a result, most people would rather pay off their mortgage without stress than consider options like mortgage refinancing. However, by refinancing, you can secure a better deal, save yourself money, reduce your loan term, and even get extra cash to renovate your home.
Below are more reasons refinancing is worth considering:
1. Take Advantage of Lower Interest Rates
A reduction in interest rates is the most viable reason to refinance a mortgage. With lower rates, you can reduce your monthly payments significantly. Consider this: if you took out a mortgage of $300,000 at a fixed rate of 6.2% for 30 years and five years later, mortgage rates reduced to 4%, this would be an opportune time to refinance your loan.
If you chose to schedule the new mortgage for the 25 years you had left on the old loan; you could stand to save $360 in monthly payments and a whopping $108,000 over the course of the loan. By taking advantage of the 2.2% reduction in interest rates, you would be saving over $100,000!
2. Capitalize on Your Improved Credit Score
Depending on your credit score when you took out your mortgage, an improved FICO score may get you as much as a 1.5% reduction in mortgage rates.
For example, let’s say your FICO score was 630 five years ago, but over time, you tidied things up, improved your borrower profile and increased your credit score to say, 770; myFICO reports that you could get as much as a 1.58% reduction in interest rates. Refinancing at this point would save you thousands of dollars.
3. Change Your Mortgage Type
To take advantage of attractive introductory rates, you may have opted for an adjustable-rate mortgage (ARM). If it seems like the rates are about to surge significantly, you may refinance and choose a fixed-rate plan that suits your budget.
Also, it is possible that at the time you took out your mortgage, your options were limited to say an FHA loan, which meant paying mortgage insurance for life. If over time, your finances have improved, you can now take out a conventional loan.
4. Reduce or Increase Your Loan Term
Depending on where you stand financially, this works in 2 ways: you may choose to pay more monthly and reduce your loan term, or you may decide to pay less monthly and increase your term.
If mortgage rates reduce considerably, you can reduce your loan term without increasing your monthly payments too much.
Here’s an illustration to simplify things: If you took out a 25-year loan of $150,000, at an interest rate of 6.5% and 5 years later, the rates reduced to 4.2%, you may decide to refinance and get a loan that runs for 15 years instead of the 20 years left on the original loan. By refinancing, you will pay a paltry $6 more every month but you’ll pay off your mortgage 5 years earlier and save over $59,000!
5. Get Extra Money for Renovations
If your home has sizable equity, you may take out a cash-out mortgage refinance and use the extra for renovations. For example, if your house is valued at $180,000 with a $120,000 pending mortgage balance, you may choose to refinance your mortgage for $150,000. This will allow you to use $120,000 to finance the old loan and use the remaining $30,000 for renovations.
The most important factor concerning mortgage refinancing is the current interest rates. If the rate is significantly lower, then you should refinance. As seen above, it doesn’t matter if you decide to shorten your loan term or leave it as is. If the rate is low enough, you will save thousands of dollars.