Refinancing – Why You Should Consider It
Most perceptive homeowners know a good idea when they hear about it, especially when it involves getting the most out of their hard-pressed budget. Since the monthly payment obligations on their home take the biggest bite out of the cash flow, they will naturally opt to explore any way at all to cut those costs, and save whatever they can over the long-haul in the process. For a multitude of economic reasons, refinancing that loan is the perfect solution, and it goes well beyond just easing up on the monthly mortgage bill. The refinance option can cover quite a few strategic motivations, and each one can make a huge impact on immediate or long-term cash concerns. Here a few of the most important factors that can influence the decision.
Mortgage Interest Rate Reduction
The amount of cash a homeowner needs to pay out every month toward the house payment can be significantly reduced with a lower interest rate. Just $100 saved each and every month over a decade will allow a homeowner to put over $12,000 back into the budget. If the original loan was approved with a higher interest rate applied compared to today’s rates, the savings could be quite large. For instance, the difference on a $250,000 refinance loan at 5% over 30 years versus 4% would be roughly $148 less paid out each month. This is approximately $53,000 in interest savings over the term of the loan. In addition, a lower interest rate also builds equity far quicker.
Monthly Mortgage Payment Reduction
If a homeowner were to consider refinancing their existing loan to a new 30-year commitment, it would substantially reduce the monthly repayment amounts. There are even lending options that offer a 40-year refinancing schedule. There is a negative to this approach however. By extending the term of the refinanced loan out beyond the current loan term, there will be much more interest paid out over the long-haul as a result. This tactic would therefore be the exchange in benefit for a reduced monthly payment amount. As an example, using a $200,000 loan at 4% interest over a 20-year term versus a 30-year term would result in an additional $53,000 paid out in extra interest, but a $257 reduction in the monthly payment.
Accelerate the Mortgage Loan Payoff
The overall loan debt can be greatly reduced by cutting down on the length of the term of the loan. Generally, the shorter the term of the mortgage, the lower the mortgage interest rates, and since the termination date of the loan is far sooner, there is far less interest to pay. In this scenario, the monthly payments are usually higher. By taking a $200,000 30-year loan at 6% versus a 15-year at 5.5% would yield a $1,199 payment versus a $1,634 payment. However, the 15-year loan would reap a significant savings of over $137,520 due to its loan term being only half as long.
Alternate Mortgage Loan Types – Fixed versus ARM
If the homeowner wishes to stabilize the monthly payments, and currently has a mortgage with an adjustable rate (ARM), or one with an interest-only schedule for a certain length of time, then the fixed-rate mortgage option would be the best choice. This is very beneficial when the current rates are at their lowest. Conversely, with interest rates being as low as they are, simply opting for a new ARM might yield better rates and lower payment limits.
Cashing Out Your Mortgage Equity
Refinancing to gain access to the equity in the home can be very beneficial for a variety of reasons, such as home improvements, debt consolidation purposes, pay tuition expenses for a family member, or perhaps to start a small business or other investment opportunities. If the homeowner qualifies for refinancing, and the approval amount exceeds the value of the home, the borrower can pocket the difference. Most lenders will consider refinancing approval when there is a minimum of 20% equity in the home value.
So if the refinancing plan is to gain access to the equity, lower the monthly payments, pay off the mortgage sooner, or pay off some of the higher credit card obligations, use the online mortgage calculators and other internet resources to find the most affordable offers that meet the desired goals, and makes that budget much more manageable.