Refinancing your mortgage loan can be affordable for many homeowners. Between the price of your utilities, your property taxes and the general upkeep of your home, cutting costs on your monthly mortgage payments could be a viable choice for saving some serious dough.
There are several things you should understand when considering options that will alter your home payments. If you’re questioning whether or not you should refinance your mortgage loan, take a look at the following scenarios where it may be helpful to consider a home refi.
How Does Refinancing Work?
You can refinance various types of loans including those for your home, car, student tuition or credit card balances. When you go through a refi, your current loan gets paid off and replaced with a new loan that has different terms. These terms are comprised of your interest rate, the length of your loan, the balance of your loan or even the type of loan you own.
When dealing with mortgages, your loan may be classified as either a rate/term refinance or a cash-out refinance. With a rate/term refinance, the goal is to lower your interest rate, the amount of each monthly payment or the length of the loan without changing your current mortgage balance.
A cash-out refinance is used to turn your existing home equity into cash. This differs from a rate/term refinance because a cash-out option is an entirely new mortgage with cash back — not a second mortgage.
Why Should I Refinance?
A home refi can create an ample amount of monthly savings. In turn, these savings allow you to increase your savings, add to a retirement or college fund, consolidate any debt you have accumulated or build equity in your home by using the extra funds for home improvement projects.
There are a number of circumstances in which refinancing would prove to be a profitable course of action. If you’re experiencing any situations similar to the following, be sure to consult with your loan provider about whether or not a refi would be a helpful approach to financial wellness.
Your Credit Score Has Improved
Let’s face it — people are more likely to make poor money decisions when they are young. It’s easy to lose track of spending when using credit cards for the first time and any substantial charges from your past could have potentially affected your credit score in a negative way. But as you grow and learn more about allocating funds appropriately, your credit score will gradually improve in time.
As your credit score improves, you will be eligible for different types of home loans. Many first-time buyers and those with low credit scores settle for FHA loans because they are backed by the federal government. This allows lenders to broaden their acceptance standards to include those with low credit or small down payments.
However, most FHA loans require private mortgage insurance (PMI) which adds a fee to your monthly mortgage payments. If you have built enough equity by owning a home over time, you can shift to a conventional loan that would help you ditch those pesky PMI payments. By changing your loan type, you could bypass paying for PMI altogether.
There is a Change in Finances
While it would be ideal if financial stability was always a possibility, sometimes life throws some unexpected twists and turns your way. Some scenarios that can cause a serious change in finances include divorce, the death of a spouse or even job loss. When unfortunate situations arise, you could use a boost to your bank account.
Saving money is of paramount importance during these times. When you refinance loans, money can be saved in several ways. Since interest rates comprise a hefty amount of your mortgage payments, getting a new loan with a lower rate can be an option to save you money in the long run. Then, you can use this extra money to help with bills or other necessary purchases.
You Have Substantial Debt
Debt can be a crippling factor when determining future financial decisions. With the average cost of living rising throughout the nation, many consumers are affected for years following large expenditures.
Two of the most common causes of debt involve medical expenses and college costs. The cost of medical care has increased especially within the last 10 years and is only expected to continue rising as time goes on. From emergency care to the price of elderly assistance, many people are financially in the red by these circumstances.
Not only that, but loans for medical expenses or college attendance also tend to have higher rates of interest. This is an instance when a cash-out refinance might be most applicable. Since the interest on mortgages are generally lower than other types, using a cash-out refinance to pay off other loans with higher interest loans can be a sensible strategy when consolidating debt.
However, keep in mind that debt consolidation can become a crutch for those that have a tendency to pile on debt. It may be tempting to start over by refinancing rather than actually paying it down, therefore it’s vital to assess all outstanding payments and make an educated decision on whether or not it’s the right choice for your unique situation. Every refinance is a chance to hit the reset button and while you do save money in terms of monthly cash-flow, you’re also extending the length of time before the debt is actually gone.
Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.
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