5 Reasons to Refinance Your Home Loan
Looking to manage your finances more effectively? Instead of scouring up loose change under the sofa or chucking up savings in a bank account, try taking the more proactive approach by refinancing your mortgage.
Refinancing your mortgage, or switching to a more favorable mortgage plan, is a great way to both take advantage of market conditions as well as safeguard your finances during periods of economic instability.
By refinancing your home loan, you can gain access to a range of benefits that can protect your financial assets and allow you to take advantage of more opportunities that you wouldn't otherwise have access to.
Still not convinced? Here are five reasons why refinancing your home loan is something you should consider, as well as one instance when refinancing may not be ideal.
1. Lower Interest Rates
Without a doubt, the most immediate advantage of refinancing your mortgage is the lower interest rate it has over standard loans.
A lower interest rate on your mortgage will result in you paying less overall, thus saving you more money over the long term.
It's typical to fulfill the agreed-upon principal and interest rate when paying off a mortgage over its designated loan period. In many contractual agreements, the interest is a fixed rate that stands for the duration of the loan.
However, you may often find it better to refinance your loan, switch to a more variable agreement, and consequently cut down on your monthly expenditure.
This is often best capitalized during two opportune moments: when your credit score is higher than it was when you signed the terms of the existing mortgage, or if the current market conditions provide a significantly better interest rate than your existing mortgage.
2. Increased Savings
The direct outcome of switching to a more favorable home loan plan is more cash saved over the month. After all, by opting for a refinancing option, it's often the case that you'll enjoy a lower monthly payment.
By refinancing your existing mortgage, you can swap out an existing agreement with a lower interest rate or more favorable repayment terms.
This will result in you significantly increasing your savings rate, allowing you to grow your financial assets throughout the loan period.
Of course, you're free to choose however you'd like to spend these additional funds. While growing your nest egg is always a sound option, you can use this extra money at your leisure should you wish to do so, too.
3. Shorten Your Mortgage Period
Refinancing your mortgage can provide more than just reduced interest rates; you may also have the option to shorten your repayment period because of the lower total rate.
If you'd rather not be locked into a mortgage plan that goes on for, say, 30 more years, opting for a refinancing option could allow you to pay off the loan much sooner. This is especially beneficial if you have the funds at present and can stomach a higher monthly expenditure rate than what you initially agreed on.
4. Select Preferred Interest Rates
When it comes to home refinancing, homeowners are often met with two different interest term agreements: fixed and adjustable.
If you're looking for a mortgage option with unchanging payments, then you're looking at a fixed-interest rate mortgage. With this mode, the monthly payment won't ever change throughout the loan period.
On the other hand, adjustable-rate mortgages (or variable interest rates) offer more flexibility. And, for better or for worse, market conditions may cause fluctuations in this type of agreement over time.
If you predict a more tumultuous economic future, then a fixed-rate loan could be the best decision to safeguard your finances.
On the other hand, if you anticipate lower interest rates in the near term, an adjustable-rate loan would allow you to benefit from the lessened costs.
5. Remove Private Mortgage Insurance
Oftentimes, homeowners have to pay 0.1% to 2% of their loan amount manually in mortgage insurance. This can equate to hundreds, if not thousands, of dollars each year.
By refinancing, however, you can free yourself from private mortgage insurance (PMI) fees, granted that you're eligible.
Generally speaking, Private Mortgage Insurance (PMI) is needed when you pay less than 20% of the home's initial down payment and loan the remaining amount.
If coming up with the down payment for your dream home is not presently affordable, you can still take out a loan but will need to pay an additional PMI on top of your mortgage.
Generally, PMI payments are automatically canceled when 78% of the loan is already paid out or if there have been no mortgage incidents after half its term. Nonetheless, depending on contractual terms and other considerations, it's possible to request the earlier cancellation of PMI.
Talking to a professional consultant can help you clear out any uncertainties you may have regarding the refinancing process. Alternatively, you can read more here to get a more thorough understanding of this process.
When Should We NOT Refinance?
Let's face it: it's alluring to quickly jump into the idea of refinancing your mortgage, but it would be unwise to do so if you're not financially ready to stomach it.
For one, you're still going to undergo the process of renewing a new mortgage plan. This, of course, will include the thousands of dollars of closing costs, from the appraisal fees to the underwriting fees.
Furthermore, should you default on this new mortgage loan, you're still bound by loan agreements. This can hurt your credit score and make it difficult to apply for loans in the future.
Regardless of these cons, refinancing your home loan can be a fantastic way to save thousands of dollars over your loan period. Just be sure to weigh your options, ensure your financial security, and perform a thorough cost-benefit analysis before doing so.