Refinancing your mortgage can be a very intimidating process, which is why you need to educate yourself on the benefits and risk of refinancing and evaluate your situation thoroughly before you decide to refinance. When you refinance your mortgage, you are essentially replacing your current loan with a new one with improved terms. Consider these 3 benefits of refinancing as evaluate all possible outcomes.
Lower your Monthly Payments
Refinancing can greatly lower your monthly payments by extending the term of the loan, reducing monthly payments. While yes, you will end up paying more in the long term due to interest, some people find it easier to make small payments over a long period of time rather than large payments over a short period of time. A fixed interest rate is usually recommended because an increased rate over a longer period of time can substantially increase the total amount paid on a loan. If you are thinking about refinancing, make sure to educate yourself on the topic and make an accurate calculation of what your payments will be, measure the benefits of a reduced lower monthly payment against an extended loan and decide for yourself if these benefits are worth it. However, if you are currently in a difficult financial position, the alluring incentive of a reduced monthly payment can help you stretch your pay check and will allow you to spend more money on the things you love doing.
Reduced Interest Payments
It is possible that interest rates have dropped since you bought your house. If this is the case, then you should be able to refinance in order to pay a lower interest rate. If done early, this can save you thousands of dollars over time because even a shift of 1 point can mean thousands of dollars saved over time. For example, if you reduce the interest rate of a 30-year $400,000 mortgage by just 1 percent you can save over $90,000 in interest payments during the lifetime of the mortgage. The fact remains that the longer you go on paying interest, the more money your mortgage will cost; while a reduced interest payment can be quite attractive in the long-term, sometimes paying your mortgage in a shorter period of time can prove to be a wise financial decision as you won’t have your money tied in one place.
Fixed Interest Rates
One of the most tangible benefits of a refinance is the fact that you can change your variable-interest mortgage to a fixed-interest mortgage. What this basically means is that instead of letting the interest rate of your mortgage be dictated by the market, you’ll have a fixed interest rate for the remainder of the mortgage. As stated below, even a 1% change can quickly turn into huge savings over time. If you are currently paying an interest-only loan and refinance it into a fixed-interest loan, it is possible that your monthly payments remain the same, but you will definitely save money in the long run.