Being a home owner is pretty much an investment and quite the financial achievement something stable, and it is an investment which grows in value over time right along with your dreams. However, life is what happens.
Maybe the interest rates have come tumbling down since you took the mortgage, or perhaps you had some time paying off your debts, so that your credit score is now through the roof. Home loan refinancing could be a smart thing to do because such changes could unlock massive savings and align the mortgage with the new goals.
However, is refinancing right for you, given the numerous considerations? Read further to know the benefits and considerations of refinancing your home loan and see if it can bring you financial peace of mind.
Accessing Home Equity
Owning a house is one serious investment that keeps appreciating along the way. You can cash in on this equity you formed in the home through home refinance programs. This way, there will never be a drying up of capital to create multiple goals.
Benefits for you, in this aspect:
Finances home improvements.
Maybe you want to refinance the house to redo the kitchen or upgrade that bathroom. Refinancing can bring those dream home improvements to fruition, improving your living space and maybe even boosting your home’s value.
Consolidating debt
High-interest debt is quite heavy on anyone’s wallet. With refinancing, you’ll have the option of consolidating the debt into a lower-interest loan, thus streamlining the payment process while saving you some dollars in the long run.
Education funding
Well, education is pretty expensive, after all. This can finance some of your child’s college tuition or continue to fund your further education.
Here is where home equity can really work in your favor: where accessing that equity can help you achieve your financial goals. And just keep in mind you are borrowing against your house. And use the money wisely. But that also means having a great repayment plan.
A lower monthly mortgage payment can really help free up some space in your budget. This opens up some cash flow that can be moved into other financial goals.
Here’s how refinancing can help you:
Debt consolidation
High-interest debts such as credit cards can really squeeze a person’s finances. Consolidating at a lower rate frees up the cash so you could pay off these debts quicker, also saving money in interest payments in the long run.
Invest for the future
You will have more money available to invest towards retirement savings or your kids’ education, getting ahead on long-term financial goals that will impact you.
Emergency fund
Unexpected expenses can blow up your budget. A lower mortgage payment will provide room to build a bigger emergency fund that can help provide a financial safety net in those situations.
The sound advantage of the lesser monthly payment is that it seems good, and one needs to watch out for long-term consequences. It pays interest for an extended period due to the prolonged loan term. Make sure that you are experiencing enough short-term benefits to overcome the additional amount for the costs of interest. You may, therefore, choose to seek assistance from a financial advisor if necessary, for correct judgment.
Shorter Your Loan Term
Refinance your loan to liquidate your home loan fast and shorter your loan term.
Here is how this strategy comes with various advantages:
Higher equity
You become owning more of your home faster. You are paying down the principal balance faster. The percentage of the home you own is what’s called the equity in your home. Higher equity translates to higher financial security.
Lower interest payments
The shorter your term of the loan, the smaller your total paid interest over a loan life time. This again is a lot of saving for especially long-duration loans.
You will have the possibility of large home equity credit line
The more equity stake in your home, the more likely you are to qualify for an expanded home equity line of credit (HELOC) in the future. A HELOC is very useful in funding renovations, education, or other expenses.
Of course, while reducing the term of your loan will have other advantages besides, it means increasing your monthly payment. The shorter the term, the higher the cost each month. Be sure that this new payment is indeed affordable with your current income.
Reshaping Your Loan
Your type of mortgage may also affect your pay each month and your financial security. Refinancing can change you from an ARM to FRM, or from FRM to ARM, depending on your goal and preference now.
Here is a summary of each:
Fixed-rate mortgage (FRM)
An FRM offers a constant rate of interest for the whole period of the loan. This makes your monthly payments stable and predictable, which can assist you in budgeting the cost of your house. It might be better suited for those who like stability and dislike surprises when dealing with monthly bills.
Adjustable-rate mortgage (ARM)
ARM can also charge a lower start interest rate compared to the FRMs. However, with this loan arrangement, the periodic change in an interest rate causes a change in your monthly repayment amount that would be risky on your tight budgets or in instances where you loathe uncertainty with costs. Conversely, if you are selling before the rate does significantly change you might want the ARM.
This will all depend on your situation and how much risk you can take. You will have to see your goals for your money, how long you will likely be in your home, and how comfortable you are with potential fluctuations in payment.
Saving money through a lower interest rate
The best way to save money is by getting a lower interest rate on your mortgage. Here’s how this works for you:
You pay less in interest.
The reduction in the interest rate automatically results in great saving on the overall interest that you pay through your loan in your lifetime. This slight decline in the interest rate can actually be a massive saving in the long run.
Accelerated growth in equity
More and more money in your monthly payments will go towards less interest on the house, growing your equity. That is how the acceleration of growth for your house builds strength into your financial security.
Even though refinancing can be such an attractive proposition in cutting the interest rates, closing fees, which may crop up from closing, must not be forgotten either since they have a tendency to suck into probable savings from dropping the interest rates. Careful analysis of figures must be considered before deciding if really, after all, refinancing does work for the case.
Conclusion
Refinancing the mortgage loan is exactly how one should relocate the mortgage to better fit current needs. Some of the possible gains for refinancing your mortgage include forming equity faster, cutting your monthly payment, or even fixing a more stable interest rate. However, in this scenario, long-term consequences or costs associated with refinancing must be considered prior to making the final decision. A financial advisor will be able to determine whether or not refinancing is the proper strategy to achieve your financial objectives and unlock long-term financial peace of mind.
About the Author
Alex Powell has over ten years of experience as a financial advisor to date. He is currently specialized in helping homeowners refinance so they may take advantage of the financial stability. Because Alex has expertise concerning mortgage strategy, he learns how to advise each client according to his goal. Outside of the office, Alex enjoys reading, hiking, and immersing himself in other cultures around the world.
