A home is often one of the largest assets one will have in their lifetime, and it is critically important to use it to your advantage. Refinancing can potentially provide a homeowner various options that can be extremely beneficial, depending on their specific situation. Here are three main perks that most people consider when refinancing their mortgage:
Lower Monthly Payment
Many people consider refinancing their mortgage in an attempt to capture a lower monthly payment. Refinancing to a longer term can potentially decrease one’s monthly payment, due to the fact that the outstanding balance is being amortized based on whatever extended term is chosen.
For instance, if someone has 20 years remaining on their loan, refinancing to a 30-year mortgage will – in theory — result in a lower payment. This has the potential to scare some however, as they do not want to set their mortgage back and lose credit for the amount of time they have already paid. Most of the time, mortgages are not coupled with a pre-payment penalty. Therefore, by extending the mortgage term to receive a lower monthly payment, one still has the ability to make their regular payment, but also has the flexibility to lean on the new, lowered payment if needed.
Utilize Home Equity
A common goal for most is to not only pay off their mortgage, but to become debt-free as quickly as possible. A great way to do so is by utilizing the equity in one’s home in order to consolidate other high interest debts. Home equity can be described as the difference between the home’s fair market value, and the outstanding balance of all liens on the property. Although equity itself is not tangible, cash-out refinances to consolidate debt will result in decreased monthly obligations – which is tangible.
Lastly, many homeowners consider refinancing their mortgage to a shorter term. This accomplishes two goals – the first being the simple fact that the home will be paid off sooner, the second is the substantial amount of interest that would be saved. However, one thing to consider when thinking about refinancing to a shorter term is the fact that more often than not, it will result in an increased payment. Therefore, one should only consider shortening their term if they have stable employment, income, and can handle an increased monthly payment in order to pay less interest over the life of the loan.
Refinancing a mortgage will not be the solution to every problem you will have as a homeowner. However, as the largest asset most will possess, it is critical to understand how to utilize it and make it work for you. If you believe a refinance would make sense, talk to a local loan officer to explore your options!