Refinancing can allow you to change the terms of your mortgage to secure a lower monthly payment, switch your loan terms, consolidate debt or even take some cash from your home’s equity to put toward bills or renovations. Let’s take a deeper look at some of the reasons you may want to refinance. There are several reasons homeowners might want or need to change their loan term. Here’s a bit more information on switching to a longer or shorter term: Longer Mortgage Term Are you having trouble making monthly mortgage payments? A refinance can allow you to lengthen the term of your mortgage and lower your monthly payments. For example, you can refinance a 15-year mortgage to a 30-year loan to lengthen the term of your loan and make a lower payment each month.You Need To Change Your Loan Term
When you lengthen your mortgage term, you may get a slightly higher interest rate because lenders take inflation into account, and a longer mortgage term means you will likely pay more in interest over time. If you know your current payment schedule isn’t realistic for your household income, a refinance can free up more cash so you can invest, build an emergency fund or spend it on other necessities.
Shorter Mortgage Term
You can also refinance your mortgage in the opposite direction, from a longer-term to a shorter-term mortgage. When you switch from a longer-term mortgage to a shorter one, you will likely enjoy lower interest rates and you’ll also own your home sooner.
Usually, switching to a shorter term also means that your monthly payments will increase, so make sure you have enough stable income to cover your new payments before you sign up for a shorter term.
You Need Cash To Pay Off Debts
If you’ve made payments on your mortgage, you probably have equity in your home. Equity is the difference between your home’s fair market value and the amount you still owe to your lender. There are two ways to gain equity: You pay off your loan principal, or your home’s value is raised. As a rule of thumb, if your loan is more than 5 years old, you’ve probably built a bit of equity in your investment just by making your regularly scheduled monthly payments.
Cash-Out Refinance For Debt
A cash-out refinance allows you to take advantage of the equity you have in your home by replacing your current loan with a higher-value loan and taking out a portion of the equity you have.
You might seek a cash-out refinance because you need money to pay off other debt. If you have higher-interest debts spread over multiple accounts, you can use a cash-out refinance to consolidate your debts to a lower interest rate, pay off each account and transition to one monthly payment. Consolidation can help you keep a better record of what you owe and reduce instances of missed payments, late fees and overdraft charges.
You Want To Do Home Improvements Or Renovations
From fixing a broken HVAC system to replacing the pink linoleum in the bathroom, you might need to invest in your home at some point or another. Using home equity can be better than taking out a personal loan or putting charges on a credit card because cash-out refinances usually have lower interest rates than most credit cards.
Cash-Out Refinance For Renovations
Though you can do anything you want with the money you get from a cash-out refinance, it’s important to remember that your refinance is still a loan. It’s a good idea to get estimates from contractors or repair professionals before you close on your refinance. This will lessen the chance that you take out too much money, or you take out too little and have another bill after the job is finished.
You Want To Allocate More To Retirement Saving
One of the most powerful tools that you can take advantage of when it comes to saving for retirement is the principle of compounding interest. The earlier you start to invest and save, the more years you have to accumulate interest on your investments before you retire.
Cash-Out Refinance For Investing
If you have equity sitting in your home but you haven’t maxed out your annual retirement contribution limits, you may end up making more money over time by taking a cash-out refinance and investing the difference.
You can also use the money from a cash-out refinance to invest in your property. Whether you want to add a new bathroom, spruce up your paint or install a privacy fence, you’re only limited by your imagination. Upgrades can bring in more money when you want to sell your house by increasing your home’s value and curb appeal, both of which can help you secure a higher final closing price.
You Want to 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 (usually 5, 7 or 10 years), the interest rate has the potential to fluctuate – and not always in the borrower’s favor. For this reason, some homeowners will opt to refinance their ARM to a fixed-rate mortgage, which eliminates this fluctuation in interest rate.
It’s also possible to refinance a fixed-rate mortgage to an ARM. This involves some risk, but it could be a smart option if interest rates are falling, or if you plan to sell your home before the initial period of fixed (generally lower) interest ends.
