Benefits Of Refinancing Your Home

Mortgages are not intended to be permanent. Although you can continue with your initial loan until the end, many homeowners choose to refinance their mortgage at some point. Refinancing allows you to modify your loan terms, which can be beneficial as your financial objectives evolve. It enables you to alter your loan type, adjust your mortgage rate, change your loan duration, or access your equity.

Here are five advantages of refinancing your mortgage:

1. You might be able to pay off your loan more quickly. Refinancing your mortgage to a shorter term can accelerate your repayment. For instance, if you have a 30-year loan and, after 10 years, decide to pay it off sooner, you can switch to a 15-year loan, allowing you to own your home outright five years earlier. The earlier you eliminate your monthly mortgage payment, the sooner you can redirect those funds towards other financial aspirations.

2. You can save money on your loan. Refinancing to shorten your loan term means you can pay off your loan faster and incur less interest. Additionally, if your new refinance rate is lower than your existing interest rate, you can save even more on interest. Here’s how this works: Imagine purchasing a home for $400,000 with a 10% down payment and a 30-year fixed-rate mortgage at a 7% interest rate. After 6 years, your mortgage balance has decreased from $360,000 to $333,690, and you’ve paid $146,135 in interest. If you continue this loan for the entire term, you will pay $502,232 in interest. However, if you refinance your remaining balance of $333,690 after 6 years to a new 30-year fixed-rate loan at a 5% interest rate, your total interest will be $311,185. When combined with the interest from the first loan, your total interest paid will be $457,320, resulting in a savings of $44,912 in interest.

3. You can lower your monthly payments. Refinancing to the same term as your original mortgage allows you to extend the repayment period, which reduces your monthly payment. Furthermore, if you refinance at a lower interest rate, your monthly payment could decrease even more. For instance, on a 30-year mortgage of $360,000 at a 7% interest rate, your monthly payment would be $2,395. After 6 years, if you refinance your loan with a balance of $333,690 into another 30-year mortgage at the same interest rate, your new loan will have a lower starting balance and reset the 30-year term, resulting in a monthly payment of $2,220, which saves you $175 each month. The downside is that it will take longer to own your home entirely. Let’s assume that interest rates were low when you refinanced, allowing you to lower your interest rate. Your new 30-year mortgage of $333,690 at a 5% interest rate would result in a monthly payment of $1,612, saving you $783 monthly.

4. Payments can become more predictable

If you currently have an adjustable-rate loan, consider refinancing to a fixed-rate mortgage to shield yourself from potential interest rate hikes. This transition ensures that your monthly payments remain consistent, as your principal and interest amounts will remain the same.

5. You can borrow equity to pay for major expenses

With a cash-out refinance, you can secure a new loan based on the current value of your home, settle your original loan, and retain the remaining funds. This cash can be integrated into your new mortgage and utilized for debt consolidation, home improvements, or funding your children's education.

When is refinancing not a wise choice?

There are valid reasons to avoid refinancing, depending on your circumstances. Here are several to consider:

When you may not reach the break-even point, although refinancing can lead to savings, it’s crucial to acknowledge its costs. If refinancing lowers your monthly payment, assess how long it will take for those savings to cover your closing costs. If you intend to sell your home before achieving that break-even point, refinancing could cost you more than the savings you gain.

Suppose the savings don’t justify the hassle. At times, the financial benefits of refinancing may not be significant enough to warrant the time, effort, and costs involved in the process. Even with a streamlined approach, it still demands a certain level of work.

Your monthly payment might rise. Opting for a shorter loan term through refinancing could lead to an increase in your monthly payment, as you are paying off your loan at a faster pace. Even if you secure a lower interest rate to save money in the long run, your monthly payment could still see an uptick.

When your home equity diminishes, a cash-out refinance allows you to access your equity, which means you will have less available for future borrowing if the need arises.

Options to consider instead of refinancing your mortgage

If refinancing isn’t your best choice, explore alternative methods to reduce your mortgage expenses.

Make additional payments towards the principal only. These payments directly reduce the principal amount, decreasing the total interest paid over the life of the loan. This strategy also enables you to settle your loan earlier than planned.

Consider a personal loan. You can choose between a secured and an unsecured loan. Secured loans typically have lower interest rates, whereas unsecured loans have higher rates but do not require collateral.

Explore a home equity loan or a home equity line of credit (HELOC).

Both options are second mortgages that leverage your home as collateral. With a HELOC, you can access funds up to a limit based on your equity and repay it with interest, while a home equity loan gives you a one-time lump sum. If you possess sufficient equity, these alternatives can enable you to borrow at more favorable rates.

The key takeaway is that the advantages of refinancing may outweigh the disadvantages.

As you consider refinancing your mortgage, take a moment to reflect on your reasons.

This reflection will clarify whether refinancing is advantageous for you, especially considering current interest rates, the duration of your new loan term, and your plans for staying in your home.

Refinancing your mortgage can be a wise financial decision, but it’s not always straightforward. Whether your mortgage term is approaching its end or you’re currently in the midst of one, our team at Black Knight Capital will assess your existing rate, analyze the figures, and inform you if refinancing is a viable option. If we can offer you a better rate, we’ll demonstrate the potential savings you could achieve.

Have you already concluded that refinancing your mortgage is the right choice? Apply for initial approval with Black Knight Capital today to begin the refinancing journey. Hit this link to apply and contact us