What Are the Benefits of a Residence Loan Refinancing?
Refinancing a residence or home mortgage loan presents several benefits. Mortgage refinancing entails acquiring a new home loan to replace an original loan. Borrowers requalify for financing with their mortgage lender or another mortgage company, and mortgage refinances are subject to closing costs (fees paid to lender for processing a loan). Before refinancing, fully understand the benefits, and then decide if refinancing makes sense for you.
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Lower Interest Rate
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Taking advantage of dropping interest rates is a key benefit of refinancing a residence. Mortgage rates increase and decrease in intervals. Purchasing a home after mortgage rates increase results in a higher monthly payment. However, refinancing the home loan and qualifying for a cheaper interest rate lowers the mortgage payment and increases monthly savings. Refinances are also beneficial for converting an adjustable rate into a fixed rate.
Private Mortgage Insurance
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Private mortgage insurance, or PMI, is an additional insurance premium rolled into mortgage payments when borrowers put down less than 20 percent on a mortgage. Acquiring 20 percent equity in a property eliminates private mortgage insurance. However, some borrowers refinance and put a down payment on the new home loan to avoid this monthly insurance. Yearly PMI premiums are approximately 1 percent of the loan balance. Eliminating PMI can reduce monthly payments by up to $100 or more.
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Home Loan Term
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Thirty-year mortgage terms help keep monthly payments affordable. Borrowers who enjoy an increase in their income can choose to refinance their residence and shorten their home loan term to 15 years and pay off the balance sooner. Decreased home loan terms result in paying less interest over the life of the loan, and this option helps build equity quicker.
Get Cash
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Real estate is a long-term investment, and as properties build equity (the difference between the mortgage balance and the property's value), owners can refinance and pull cash from their equity. Cash-out refinancing gives owners the opportunity to borrow money against their equity and use the money for numerous purposes. Common uses of cash-out refinances include debt consolidation, home renovation projects, travel, start-up capital for a business or college expenses.
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