If you are a homeowner who is currently paying off a mortgage, you may have heard about the possibility of refinancing your mortgage. While this may sound complicated, the fact is that traditional refinancing simply involves a swap of your current mortgage for a new one. But how can such an exchange possibly be beneficial? Keep reading below for three key reasons why.
Lower Interest Rates
When it comes to interest rates, few people appreciate how much of a difference even a single percentage point can make. Consider an example of a home that is sold for $400,000. Assuming a down payment of 20% ($80,000) and a fixed 4% interest rate over 30 years, monthly payments (excluding taxes, insurance, and homeowner's association fees) will come out to $1527 per month. Keep all other variables the same but change the interest rate slightly to 3%, and monthly payments are lowered to $1349. Over the course of a 30-year mortgage, this means saving a staggering $64,508. As such, taking advantage of lower fixed interest rates is by far the most popular reason people choose to refinance their mortgage.
Adjustable vs. Fixed Rate
Another huge advantage of refinancing your mortgage is that it gives you the ability to switch between an adjustable and fixed-rate mortgage. If you initially chose to pay an adjustable rate but are confident that the rates currently offered are the lowest they will be in the foreseeable future, it may be wise to switch to a fixed rate. On the other hand, if you're locked into a high fixed-rate mortgage at the moment and expect rates to gradually fall, an adjustable rate is likely the better option.
Increase Cash Flow
If the equity of your home has risen, there are good reasons to consider cash-out refinancing. This type of refinancing allows you to exchange your current mortgage for a larger one, and then use the difference to increase cash flow. Two of the most popular reasons homeowners opt for cash-out refinancing are to remodel parts of their home (with the goal being to further increase its value) or to pay for college expenses. That said, because there are no strings attached to this spending, it is all too easy for many people to fall into consumer debt that does not justify the refinancing. Speak with an experienced lender if you think cash-out refinancing would work for you.
For more information about mortgage refinancing programs, contact a local company.