More Americans than ever now owe a mortgage on their primary residence. Repaying these loans is a constant source of stress and anxiety for many homeowners, but it is something that, as responsible homeowners, we have to stay on top of.
Refinancing is something that not nearly enough homeowners in the United States are aware of. It is something which can be used in order to save some households a significant amount of money each year. In order to refinance a house, the mortgage owner repays some or all of the debt that they currently owe in order to take out another mortgage, allowing them to negotiate new terms on the new loan.
Usually the goal of these negotiations is to secure either lower monthly payments on the new mortgage, or to shorten the overall term of the mortgage. When it is done under the right circumstances, refinancing is an excellent way to save some money during the long run. Below are just some of the advantages that refinancing your home can bring.
Raise the Value of Your Property
There is a type of refinancing loan which is known as a cash-out refinance. This type of refinancing allows the borrower to take out a new mortgage which is worth more than their current one. The incentive to do this is that the borrower then receives a certain percentage, usually around 80% of the difference between these values in the form of a cash payment. This is therefore becoming a popular route for those looking to carry out renovations on their property. When such renovations are done with some careful planning and forethought, they can be used to increase the value of a property enough that the homeowner can ultimately recoup the cash pay-out that they invested in the property.
Before pursuing a cash-out refinance you should ensure that you have a good understanding of the terms and conditions, as well as how you are planning on investing the cash pay-out. You should only attempt this type of refinancing if you are confident in your ability to carry out renovations and are confident that they will add enough to the value of your property to make the transaction worthwhile.
Better Rates
Most people turn to a home mortgage refinance as a way of securing better rates on a mortgage. In particular, it is true for many households that the monthly payments on a mortgage are a constant, albeit necessary, drain on the homeowner’s resources. By making the necessary payment to allow for refinancing to occur it is possible for individuals and families to save a considerable amount of money in the long term.
Most financial experts advise that if you can secure at least a 2% saving on your interest rate then you should seriously considering refinancing if you can afford to make the down payment.
Shorter Terms
Securing a shorter total term on a mortgage is a great option for those who are happy with their current monthly rates but don’t want to be tied down to a property for the long term. If, for example, you hold a 30 year-fixed mortgage on a house but would like to have the option of moving house and relocating in the future, then reducing your total term to 15 years or less gives you room to maneuver in the future. Reducing the term on a mortgage can also allow individuals to avoid being in debt when they retire.
Savings Offset Costs
Whatever the specific terms and conditions of your refinancing, you will need to spend some money in order to make it happen. You will need money, not just to pay off the loan itself but you are also likely to need to cover the lender’s closing costs which are generally an additional 2-5% of the value of the mortgage you have just paid off. It is possible to take out another refinancing option to cover the fees associated with the lender’s closing cost, however the trade off here is that you will most likely have to accept slightly less advantageous terms. For this reason, it is much better to wait until you can afford to cover the closing costs yourself before pursuing a refinancing.
Exactly what you want to achieve with your refinancing will depend on your individual circumstances. Remember, though, that you will probably only get one shot at this as refinancing is expensive.
Home refinancing is a sound and tested method for securing better rates on a mortgage and can make an enormous difference to an individual’s or family’s finances over time.
