Homeowners often consider whether to refinance their homes or not. There are many reasons for refinancing, but there can be a lot of confusion about these reasons and how they impact the homeowner. The following article will list five great reasons to refinance your home so that you can decide if refinancing your home is right for you!
Why Should You Refinance My Mortgage?
Change The Term of Your Loan
There are many reasons homeowners may desire to change their loan term. Here’s a better understanding about switching to a longer or shorter loan period.
Long Term: Switching to a longer term might be beneficial if you’ll need the cash for an upcoming purchase, such as buying a new home or sending your child off to college. The interest rate on long-term loans is usually lower than short-term rates because there’s more time for compound growth in the principal balance. A refinance allows you to lengthen the term of your mortgage and lower your monthly payments.
Short Term: If you want to take advantage of a low-interest rate but don’t plan on living in your home for more than another year or two, it might be worth switching to a shorter-term loan. Switching from a longer-term mortgage to a shorter one offers the benefit of lower interest rates and the opportunity to own your home sooner.
Pull Cash Out To Pay Off Debts
Equity in a home can be a source of cash to pay off debts. Refinancing your home allows you to borrow against the equity in a property so that it may be used as working capital or invested elsewhere.
If you’ve made payments on your mortgage for an extended period, or if home prices have gone up since you purchased your home, you probably have equity in your home. Equity is the financial difference between the current value of your home and how much you owe on it.
For example, if your mortgage balance is $200,000, but your house’s value has risen to $250,000 because of increased property values in the area where you live, then you have $50,000 in equity. A cash-out refinance will allow you to borrow against that equity.
A cash-out refinance is best used for:
- A financial emergency or unexpected expense (for example, replacing your roof)
- The terms of your current loan are too expensive, and you can find something cheaper in today’s market.
- Consolidating credit card debt, a student loan, or other debt into your mortgage
- Lowering the interest rate on your current mortgage.
- The home is worth more than you owe on it, and you are considering moving (for example, because of an upcoming job relocation).
- Your income has increased over time and now qualifies for a better type of loan product.
Money for Home Improvements Or Home Renovations
Home improvements, renovations, and repairs such as fixing a broken HVAC system, replacing tile or fixtures in the bathroom, to updating your kitchen are great candidates for pulling some equity out of your home with a refinance.
If you are in great need of home improvements, refinancing is probably the best way to go. Refinancing can help you access cash equity in your home for repairs or renovations.
Reinforce Your Retirement Savings
One of the best tools for saving for retirement is compound interest. Compound interest means that the interest you earn on your investments builds upon itself, and this snowball effect can help create a more substantial nest egg.
When it comes to achieving financial security in retirement, small contributions can generate significant wealth over time. You can refinance your home to pull money out to invest in other retirement instruments.
Convert An ARM To A Fixed-Rate Mortgage
An adjustable-rate mortgage (ARM) generally offers borrowers a lower interest rate at the beginning of the loan. But after a fixed period, the interest rates can increase, which means your monthly payments will also increase.
The process of converting an ARM to a fixed-rate mortgage is called refinancing and may be an option for you if you’re planning on staying in your home for an extended period and want stability in your interest rate.
Whether you want to get a better interest rate, lower your monthly payment, adjust your loan term, or access cash for home improvements and pay off debts, a refinance could help get you closer to achieving all of those goals.