Refinancing your mortgage is an option if you are looking to save money or increase cash flow. You might want to lower the interest rate on your mortgage to reduce your monthly payments or you might want to refinance your home to pull out equity for liquid cash.
Refinancing is applying for a new mortgage to pay off the old mortgage. There are many factors to consider when deciding if refinancing is right for you.
Here’s how to understand if you should refinance and how to do it.
The different types of refinancing options fall under two categories—increasing liquid cash or lowering monthly payments.
You can apply for refinancing to:
Refinancing your mortgage is usually a means to save money you would normally be spending on your mortgage to save, invest, or spend elsewhere.
Pulling equity out of your home can give you access to cash you otherwise would not have. You can use this cash to repair your home, make a major purchase like another property or vehicle, pay for education, etc. If you use the cash to repair your home you can also deduct the interest from your taxes.
Refinancing your home and pulling out equity can create new opportunities for homeowners to make investments or improvements to their life.
Refinancing your home to get a lower interest rate can free up a portion of your monthly income that would normally go towards paying interest on your mortgage. Let’s say you can lower your interest rate by 0.5%. Whatever the difference is between your original monthly payment and your new monthly payment, is now extra money you can spend or save.
Refinancing your home can also shorten the length of your loan which would allow you to pay down your debt and build up equity faster. There are many reasons you might want to pay off your home sooner. Perhaps you want to purchase a rental property or just reduce your overall debt.
Refinancing your home is creating a new home loan. You are technically paying off the old loan with the new home loan. There are costs associated with applying and there can be extra fees depending on how you pay down your loan.
While the market is not something you can control, your credit score is. The better your credit score is, the lower your interest rate will be which will ultimately save money. Having a high credit score also gives you more options. It will be easier to get approved with different lenders and for different types of refinancing if you have a good or excellent credit score.
Before you apply for refinancing, make sure you have a plan for what you are going to do with the extra cash and how you are going to pay off the loan. Assuming you’ve weighed the benefits and the potential risks, here’s how to refinance your home mortgage.
Once you’ve assessed your financial goals and the potential risk you’re ready to decide if refinancing is the right option for you. Timing is key so make sure you are working on increasing your credit score, lowering your debt, and increasing your income as you time the market.
When done correctly, refinancing your mortgage can be a powerful tool to save tens of thousands of dollars.