For many homeowners the first mortgage they get is just the first in a series of loans for the same home. They are usually aware that they will refinance at some point and they plan on it. Other homeowners intend to stick with one loan for the remainder of the term but find them self considering a refinance a few years down the road. And still others just play it by ear waiting to see what life brings. Loan refinances are very popular and can be an effective way to save money every month or to receive money from investing.
Benefiting from a Refinance
- Interest rate reduction. With the current real estate market the way it is refinancing a loan is very popular. Thousands of people are getting the refinances done because they know they can save money with lower interest rates. Of course, a lower interest rate is the first benefit of a loan refinance especially with rates as low as they’ve been. When you refinance and drop the interest rate a point or two you can save money monthly and thousands of dollars over time. The difference a percentage point makes on the amount of interest you’ll pay be the end of the loan term can be staggering. An interest rate, when reduced, is always a good thing.
- Mortgage payment reduction. Refinancing a loan is also helpful to homeowners because more often than not they are able to reduce their mortgage payments. This often goes hand in hand with the reduced interest rate. When a homeowner refinances and the mortgage payment drops a couple of hundred dollars he/she can then use the extra money to improve his/her financial state, or even pay it off that much sooner.
- Access to equity. Another benefit of the refinance is that it enables you to take the equity out of your home and use it elsewhere. Cash out refinances are very popular because people want access to the money they know is stored in the home. However, these refinances do increase the mortgage amount so they are increasing their debt, but the money still is great for investments. Using the money you have in an already existing investment and rolling it into other investments, with the advice of a financial adviser, is a smart way to utilize the money at your disposal.
Where a Refinance Will Cost You
- Fees and closing costs. Refinancing a home can offer great benefits to the homeowner but you should also be aware of the responsibility you’ll be taking on. First off, there are fees— refinance loans are not free and you’ll have financial requirements that you’ll have to cover. Sometimes these fees can be added to the loan but that usually results in an increased interest rate so it’s a higher risk loan for the homeowner. Every refinance also comes with closing costs which will be coming out of your pocket. On average, between the fees and closing costs you will have to pay a couple of thousand dollars to get the refinance completed.
- Amortization schedule. All loans also have amortization schedules; schedules that determine how much interest you will pay every month for the life of the loan. Typically, you pay more during the first five years of the loan and then the amount starts to reduce. By the end of the loan you’ll be paying quite a bit more in principle than interest. Here is the downside: when you get a loan refinance that schedule starts over. If you’ve been in a loan for five to ten years and your schedule restarts you’re back to paying off more in interest than in principle on the mortgage. This aspect definitely needs to be considered before refinancing. A good rule of thumb is to get a refinance calculator and crunch the numbers before you sign on the loan. That way you can make sure the refinance is going to benefit you financially before you’re committed.
When you ask whether or not a refinance is worth it you’re going to find that there isn’t a black and white answer. There are many pros and cons to consider that will either make the refinance a positive experience or create a negative one. Refinances do have many benefits for homeowners as mentioned above, especially when rates today are as low as they are. Everybody likes to see interest rates and mortgage payments drop but nobody wants to see the final dollar amount increase. So it’s up to you to really look at the numbers and work with a loan professional to determine whether or not the refinance will benefit you.