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6 Reasons When Refinancing Your Home Is Actually A Smart Move

Refinancing can be scary but sometimes it can be the right option.

Every smart homeowner should assess the market at least once a year for an overview of the latest interest rate on mortgages. The year 2019 has been a favorable year for refinancing given that interest rates have dropped to unexpected lows. According to this article on the Forbes magazine, expert finance organizations are estimating that the end of the year will see a drop in mortgage interest rates to below 4%. Freddie Mac puts the numbers at an average of 3.7% while Fannie Mae and Mortgage Bankers Association expect averages of 3.9% and 3.8%, respectively. Although interest rates are, undoubtedly, the deciding factor that should influence your decision for refinancing your home, you’ll want to keep various other considerations in mind before putting down your application.

1. Lower Interest Rates Reduce the Payments You Make Each Month 

When refinancing your home, you’ll switch out your existing mortgage and replace it with a new mortgage at a lower interest rate. The new lender pays out the old mortgage and you’ll continue making monthly payments to this loan provider. The only difference is that you’ll pay a lower rate of interest. If you continue to make the same payments as before refinancing, you could gain more equity on the home in the same time.  

Let’s try an example. Say, your home costs $200,000 and you have a 30-year fixed-rate mortgage on it at a 5% rate of interest. Using a mortgage calculator, you’ll find that each monthly payment works out to $1,123. If you can lower the interest rate by 1% to 4%, your monthly payments drop to $1,030. Although the difference is just $93, this amount translates into added equity you’ll build. 

2. Take Advantage of Low-Interest Forecasts 

Most mortgages carry fixed-rate or variable rates of interest depending on the terms and conditions at the time of taking out the loan as explained by Bankrate. If you take a fixed-rate mortgage, you’ll pay the same monthly payment all through the loan term, irrespective of the changes in market rates. On the other hand, if you have a variable rate mortgage, the lender works out the monthly payment according to the current rate in the market, as laid down by the apex financial institution of the country. When refinancing your home, take into account the forecasts for the mortgage arena as predicted by experts.  

For instance, if the expected rates could drop even further in the coming years, you could consider opting for a new variable rate mortgage and take advantage of interest savings. However, if the forecasts talk about an uncertain market, it makes sense to lock in the low-interest rate that is available, right now.  

3. Choose Lower Rates to Shorten the Amortization Period 

Check out this feature on Investopedia that explains how it is possible to shorten your mortgage term by as much as half simply by switching to a low-interest loan. For instance, say your home is valued at $100,000 and you have a mortgage at a fixed 9% rate of interest for 30 years. In case you were to lower the interest rate to 5.5% by refinancing your home, you could cut down the amortization period from 30 years to 15 years simply by making a small increase in your monthly payments. If you’ve been paying $804.62, you’ll now pay $817.08 and be debt-free in a significantly shorter time. 

4. Use the Home Equity as a Source of Funds for Investment 

Refinancing your home allows you to tap into the equity of the house and use the funds. However, it is advisable that you use these funds only to make investments that are likely to appreciate in the future. For instance, if you were to use the funds to make improvements and renovations, you’ll raise the value of the house. Or, you could consider investing in the stock market or buy more real estate. Before borrowing against your home equity, be aware that not being able to keep up with payments could result in your losing the home. Choose secure avenues for investing your money and make sure you use the equity to build more wealth. 

5. Qualify for More Favorable Interest Rates Because of Improved Credit Scores 

Applying for a new mortgage makes sense if your credit rating has improved since you last took out the loan. When you scout around for a new loan, the lender will likely take into account the new credit scores and offer you lower rates of interest just as the folks at CreditKarma reveal. Let’s assume that you have a house worth $100,000 at the interest rate of 5% over a 30-year period. This rate was calculated according to your FICO scores ranging from 660 to 679. If you find that improved scores now stand at between 700 and 759, you could apply for a refinancing your home and 4% interest rate. As a result, your monthly payments could drop from $537 to $477. This difference could earn you savings worth $21,600 for the entire value of the house.  

6. Cash Out the Appreciated Value of the House 

If the value of the property has appreciated, you could consider cashing out the added value and using it for making investments elsewhere. For instance, assuming you bought the house for $200,000 and paid a down payment of $40,000. If the current price of the house, 5 years down the line is $250,000, you could go for a new mortgage and withdraw the difference of $50,000 in cash. Use the money to pay for a child’s education or any other commitments you may have.  

While refinancing your home and taking advantage of falling interest rates is always a smart move, it helps to have a clear view of how to use the savings prudently. Avoid the temptation of spending the money on frivolous expenses and focus on how you can build long-term wealth and prosperity. 

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