Manuel Alcantara, Negosentro | Most Americans owe mortgages on their homes and repaying these is a constant drain on our resources, albeit a necessary one. People are surprisingly unaware of the possibility of using a home refinancing as a means to save themselves some serious money in the long run. Refinancing involves paying off the debt you currently owe in order to secure a new loan with different terms. These can range from lower monthly payments, to shortened overall terms. Because of this, home refinancing can quickly pay for itself through the accumulation of savings and is also a great way of rapidly building up your home equity.
Increase the Value of Your Property
By taking out a particular kind of refinance home loan, known as a cash-out refinance, borrowers can take out a new mortgage which has a greater value than their current one. By doing this, they receive a certain percentage, usually around 80%, of the difference between these values as a cash payment. This money can then be used for a remodeling or other means of increasing the value of a home. Before pursuing this home refinancing option, you should be certain that you understand the current value of your home and have an idea of how much value will be added by your planned construction. Also note that it is a bad idea to use this form of refinancing in order to achieve a quick cash injection as this is very risky and could cause you serious trouble down the line.
The possibility of negotiating lower monthly payments is what draws most people towards refinancing. Refinancing will cost you money, both to pay off your current loan and in order to cover lender’s closing fees, but the hope is to offset these costs by making significant monthly savings. The general rule of thumb is that if you can afford to refinance enough to secure a reduction of 2% in your interest rate then it is worth the investment.
Another option for refinancing, for those that are happy with the current monthly payments, is to opt to shorten the term of their mortgage. For example, a 30 year-fixed mortgage could be switched to a 15-year one, effectively halving the amount of money you will pay in the long term. For many people, this can make the difference between being in debt and not being in debt during retirement.
Savings Rapidly Repay Costs
However you approach your refinancing you will need to spend money in order to reap the benefits. You will of course need money on hand in order to pay off the current loan, but you will also usually need an additional 2-5% of this value in order to pay the lender’s closing costs. Often you will have the option of taking out another refinancing against the amount of the closing costs, but this will mean you won’t be able to secure a deal as advantageous. It may be better to wait until you can pay the additional fee yourself in order to ensure you are able to secure the best deal possible. You should calculate both options beforehand and decide based on your individual circumstances which is the better option for you.
Everyone has different goals in mind when they refinance; for some people, it’s about saving money through lower interest rates and monthly payments, others are hoping to reduce the overall term length with a view to ultimately selling the property. Some are even able to make money from cashing-out against the value of a new, even higher loan, and putting the money into a home remodeling which increases its value. In some cases, it is worth pursuing a refinance home loan where you can save enough money to justify the second loan. However one approaches home refinancing, the savings made should rapidly cover the money spent on costs.
Home refinancing is a fantastic opportunity to secure better rates on an existing loan or to set up a new one entirely. If you are looking forward to your retirement, then you should consider, for example, the potential offered to you by shortening the terms of the mortgage you have against your home. This not only ensures that you don’t begin your retirement still in debt, you at least minimize the amount of time you spend in debt. For others, there are new opportunities offered by a cash-out deal and they often use the money to increase the value of the property.