Refinancing your mortgage is a big decision and requires some considered thought before pulling the trigger. Technically, you can refinance your home whenever you want — and a bank will approve it — but that doesn’t mean it’s always a good idea. There are a number of good reasons, and many, many more bad reasons to consider refinancing as an option. Refinancing is simply the reappraisal of your home in order to secure a new loan.
The process pays off your previous outstanding balance while locking in a new rate or term based on a new mortgage. With interest rates on the decline today, this could be a great opportunity to reduce your overall costs by thousands or more. However, this is a whole new loan, and with it comes the paperwork and fees one might expect on any loan application. The costs may be worth it, but you must always consider your options carefully before jumping in.
A refinance calculator is an incredibly helpful tool for judging the soundness of a refinancing opportunity and should be one of your go-to sources for considering any major restructuring. Here are some reasons to consider refinancing your mortgage.
Locking in a Lower Interest Rate
Refinancing is primarily done in order to take advantage of falling interest rates. The rates offered by banks fluctuate based upon a variety of factors including overall economic health in the country’s markets and other major indicators of financial prosperity. The coronavirus has sent bank rates into freefall, meaning a refinance today might net you major savings on your mortgage bill over the coming years. However, you may have already bought during a favorable market, and enjoy a great rate now. Evaluating your refinancing options every few years is something that every homeowner should do in order to maintain the best possible cash flow health for his or her family finances.
Shifting from Variable to Fixed
Another reason to restructure your home loan is to change from a variable-rate to a fixed one, or vice versa. Both types carry significant advantages, and the ability to change your mortgage structure along with the prevailing economic winds plays to your advantage as the borrower. Using a calculator to work out your monthly payments and overall burden under different types of loan structures can help you to make smarter financial decisions over the long term.
Essentially, a fixed rate gives favorable preference over today’s variable market rate but locks you into that price for the term of the loan. If the market rate rises, you get to enjoy outsize protection as your rate stays static. However, a variable rate can net you the savings of a falling central bank interest rate. The fixed variety keeps you stuck on a higher rate as the overall rate declines.
Clearing the Loan Faster
You may also want to refinance your loan in order to shorten the payment duration of your remaining bill. As we age, we often see pay rises that build new financial opportunities that simply weren’t feasible five or ten years prior. Restructuring a thirty-year loan into a newly disbursed ten-year alternative can see your mortgage burden shrink overnight.
Take equity out of the home to finance renovations.
You may also want to finance a renovation to your home, increasing the property’s living space and value. Instead of acquiring a second loan to cover the costs, one option is to simply refinance the home and utilize some of your built-up equity to pay the costs. This is great for homeowners thinking of moving in the near future. It allows you to engage in upgrades without dipping into your hard-earned savings and likely improving the resale value of the property in the process.
Add property to your investment portfolio.
Finally, refinancing for those who own the majority share of the home’s equity could be enough to put you over the top on buying a new investment property for cash. This means you can simply tap into your current asset’s value in order to add to your investment holdings without taking on a second loan at the same time.
Refinancing is a great way to extract capital or reduce the payment burden on your current home loan, take the time to learn whether this benefits your family and home, and make a smart financial decision.
