If you love your house but not your mortgage, it may be time to refinance. Granted, no one exactly looks forward to paying that mortgage bill every month, but at the same time, all mortgages are not created equal. Some have much better conditions than others, meaning you pay less on your monthly bill. If you have a sneaking suspicion that your current home loan could be better, it may be time to refinance to a new one. So, what kind of impact could refinancing have on your situation? Check out the top five benefits of refinancing to figure out if this is the right move for you as a homeowner.
1. Lower Your Interest Rate—Along with Your Payment
If you bought your home at a time when the interest rates were kind of high—and they’ve dropped quite a bit since then—now may be a good time to refinance. Depending on how many percentage points the interest rate drops after refinancing, you could save hundreds of dollars a month on your mortgage payment!
In fact, lowering the payment is the most common reason people refinance their home loan, making the lower interest rate among the top benefits of refinancing. So, if you’re struggling to pay your monthly mortgage and would like the chance to lower that payment, refinancing your home may be a good move for you.
Even if you can afford your current mortgage payment, but like the idea of saving money in interest over the life of the home loan, you should look into refinancing to a lower interest rate. For instance, if you refinance a $250,000 home loan to reduce the interest rate from 6% to 3%, you’d save more than $400 every month. If you can think of a few ways you’d rather spend that money than sending it to your lender—like buying a new TV or remodeling your kitchen—you should refinance.
2. Get a Fixed Interest Rate
When you look at your interest rate, it’s not just the number that counts. It’s also the type of interest rate, such as whether it’s a fixed or adjustable rate. If it’s the latter—also known as an ARM—you may want to refinance before the rate increases. So if your rate adjustment period is coming up, and it’s clear that your rate—and house payment—will increase soon, you should consider switching to a loan with a fixed rate.
Refinancing to a new home loan with a fixed rate will ensure you have the same rate for the life of the loan, meaning you won’t have to worry about your house payment suddenly going up due to a rate increase. And the ability to switch loan types is one of the best benefits of refinancing, so you might as well take advantage of it when interest rates are low.
3. Change the Loan Term
Another detail that matters when it comes to your loan is the term. This refers to how long you have to pay off the home loan. The 30-year loan term tends to be the most common option, meaning you should be done paying it off 30 years from the date of your home purchase.
But another popular option is the 15-year loan, which cuts the term in half. While it requires you to pay more every month, it can greatly reduce the interest you’ll pay over the life of the loan. Plus, you’ll be done paying off your house in 15 years! If this appeals to you and you currently have a 30-year home loan, you might want to refinance to a 15-year term.
Of course, your monthly payments will be higher when you switch loan terms like this. But since mortgage interest rates on 15-year loans are lower than 30-year loans, your new payments might not be as high as you’d think. And that’s especially the case if rates are lower now than when you bought your house, as your new rate should be much lower than before.
If you can’t picture paying nearly double what you are now each month, you may be able to compromise by switching to a 20-year home loan. This way, your payments won’t go up by much, and you’ll own your house free and clear about 10 years earlier than you had expected!
4. Remove PMI
Another one of the benefits of refinancing is the chance to remove private mortgage insurance (PMI) from your home loan. Depending on your mortgage loan, if you bought your house without putting at least 20% down, you may be paying PMI every month. This can cost about $30 to $70 per month for every $100,000, meaning it could cost you up to about $140 per month on a $200,000 house.
But once you have at least 20% equity in the home, you can remove the PMI by refinancing. So if you want an easy way to save a little money on your mortgage every month, refinancing to get rid of PMI is a great start. Just think of what you could do with that extra money once you refinance. It may not sound like much, but it definitely adds up over the years!
5. Pay for Major Expenses
Another way to take advantage of your home’s equity is to do a cash-out refinance. This allows you access to a lump sum, depending on how much equity your home currently has. So as long as your house is worth more than your mortgage—due to you making payments for years, the home’s value increasing, or a little of both—you should consider refinancing.
In most cases, you can cash out up to 80% of your home’s value when you refinance. So you’ll get a new mortgage loan for the amount you’re refinancing, and a lump sum of money that you can spend on anything you’d like. Many people use that money to make home improvements and major repairs to the house, which are often sorely needed after you’ve been paying on it for several years. So if you need a new roof or finally want to start that bathroom remodel, refinancing can help greatly.
But some pay off high-interest debt—like credit cards—since this can save money in interest over time. You might also choose to use the money to pay for college, medical bills, or any other big expenses that you normally couldn’t afford upfront. The choice is yours! This flexibility is one of the benefits of refinancing when you need cash.
Now that you know the most popular benefits of refinancing, you should consider if it’s the right move for you. At LemonBrew Lending, we’ll discuss your options when it comes to your home loan and walk you through the process of refinancing if you decide to take this step. So contact us today if you’re ready to experience the benefits of refinancing for yourself!