Purchasing a home is a major financial transaction, and usually involves the potential homeowner becoming a borrower as well. Most homeowners secure mortgages that last for 30 years, while some opt for longer mortgage terms to secure lower monthly payments.
The length of time it takes to pay off a mortgage and the cost of interest you will pay over the lifetime of the loan are critical reasons to consider refinancing your mortgage. There may be fees associated with refinancing that make the potential benefits irrelevant. That being said, there are also reasons why refinancing may be a smart move.
1. Significant Savings
When interest rates drop, you may be tempted to refinance your mortgage to decrease your payments. How much your payments will decrease will be determined by the decline in interest rates, and will be affected by any fees you have to pay for refinancing. It’s vital to assess market trends and calculate the costs as well as the savings. You may save hundreds, or even thousands, of dollars per year if you can reduce your interest rate by even 1%. The size of your loan will also impact your savings.
You may also want to consider refinancing to reduce the length of time it takes to pay off your mortgage. If you’ve only been making payments on your mortgage for a few years, you may save money by reducing your loan’s interest costs. Reducing your mortgage’s length can reduce the costs of being a homeowner, but make sure that you can afford the higher monthly payments before considering refinancing.
Compare refinancing options using a customized tool that will help you refinance a home loan. This kind of tool generates all the potential loans you could consider when refinancing. You will be able to compare the loan’s length, the interest rates and the monthly payments for each option. This information will ensure that you can make an informed decision about whether you will effectively reduce your monthly payments or make the term of your loan shorter.
2. Personal Circumstances
Refinancing your mortgage may be a necessity due to life circumstances. Personal emergencies or exciting family developments can have a significant impact on your finances.
If you’re expanding your family, you may want to take out a 529 Plan for an Unborn Child. These types of 529 plans earn interest, which is not taxable. You do not have to pay taxes on money withdrawn from a 529 account, either. You may be able to claim your contributions against your state taxes, although you cannot claim deposits into a 529 account against your federal taxes. Reducing your monthly mortgage payments or getting a tax break can help give you a head start saving for education expenses and enable you to afford the extra monthly costs associated with raising children.
You may also need to refinance due to divorce. Refinancing can provide you with an opportunity to retain your home while dividing your assets with your former spouse.
3. Accessing Equity
Your home’s value may increase due to changes in the real estate market or improvements you have mad. The portion of your mortgage payments that go against the principal loan also increases your equity. Under the right circumstances, you may be able to access a considerable amount of money by refinancing to access your home’s equity.
Your home’s equity can be used to pay off existing debts, finance your child’s education or pay for upgrades to your home. Using the value of your home and tapping into your home’s equity can be one of the most affordable ways to pay for repairs or renovate your property. You may also have personal reasons you need to consider renovations. You may need an extra bedroom or bathroom to accommodate a larger family, and want to save for a child’s college education. A married couple may want to put money aside for any unborn children they’re planning on having, or set money aside in a retirement account. You may also need to care for a parent who is ill. Under these circumstances, refinancing your mortgage to access your home’s equity and pay for renovations may be a sound financial decision.