For many homeowners, the first mortgage they get on their home is just the first in a series of loans for the same home. They know that they will refinance at some point, and so they just plan on it. Other homeowners will play it by ear, waiting to see what life brings. Loan refinances are very popular and can be an effective way to save money or get money for investing. But though they are effective, are there ever times when it’s not worth it?
Benefits of a Loan Refinance
With the real estate market, refinancing a loan can help a lot. Thousands of people are getting their refinances done because they know they can save money on the lower interest rates. The interest rate is the first benefit of a loan refinance, especially with rates today as low as they are. When you refinance and drop the interest rate a point or two, you can save money monthly and in the long term loan. The interest rate, when reduced, is always a good thing.
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, he can then use the extra money to improve his financial state, or continue paying it toward the loan to pay it off faster. Either way, there are benefits.
Another very impactful 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 have built up in the home. These refinances do increase the mortgage amount so they are increasing their debt, but this money is perfect for investments. Using the money you have in an already existing investment and rolling it into other investments, with the advice of a financial advisor, is a smart way to utilize the money.
Fees, Amortization Schedules, and the Fine Print
Refinancing a home can offer many benefits to the homeowner, but you also need to be aware of the responsibility you’ll be taking on. First off, are the fees. Refinance loans are not free so they all have financial requirements that you’ll have to cover. Sometimes these can be added to the loan, but that usually increases the interest rate so it’s a higher risk loan for the homeowner.
All loans have amortization schedules as well, which are schedules for the amortization of the interest. Basically, these schedules determine how much interest you are paying every month for 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. 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 more interest than principle on the mortgage. This needs to be considered when refinancing. A good rule of thumb is to get a refinance calculator and crunch the numbers before you sign on the loan. You want to make sure the refinance is going to benefit you financially before you’re financially tied up in it.
When you ask whether or not a refinance is worth it, you’re going to find that there isn’t a set answer. There are many factors that come into play that will affect whether or not the refinance you are looking for is going to have a positive impact on your finances. Refinancing has many benefits that they offer 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 the way you need it to.