Saving money is the primary reason for a home refinance, and there are several ways to accomplish this. One or more of the following points may apply to your situation, which can add up to reducing your monthly expenses:
How much do rates need to drop before refinancing?
You may have heard about a rule of thumb but, there really is no specific number. Instead of looking at a rate, compare the savings between your existing monthly payment and the home refinance payment. Use only the principle and interest payments on a loan amount that includes the closing costs, but does not include taxes, insurance, or cash out. Then decide if the savings makes it worth your effort.
Can you save money by refinancing credit card debt?
Most credit cards charge high interest, which is compounded daily. If you are carrying a substantial balance on credit cards, you may have a good chance of saving money by refinancing your home. Consolidating high interest debts with a low rate mortgage could reduce your monthly payments, and convert the debt into a tax deductable, simple interest loan.
Do you need money to pay for personal expenses?
You may have medical expenses, a college bound teenager, or maybe your home is in need of a new roof, or perhaps you would like to take your family on vacation. Whatever the reason, a home refinance with cash out can provide money for personal expenses. As long as you have sufficient equity in your home, refinancing could be one of the cheapest ways to access funds at a low rate.
Should you refinance from an adjustable a fixed rate?
An adjustable mortgage can be fine while rates are low, but eventually mortgage rates go up, and your payments will increase accordingly. Adjustable loans have a purpose, which is usually for short-term savings. If you plan to keep your home for a long time, refinancing to a fixed rate can provide long-term savings. You may not see much change now, but you could save money down the road.
Can you save money by reducing the mortgage term?
Getting a shorter term on a home refinance can reduce the amount of interest you pay over the life of the loan. Your monthly payments will probably increase, but your overall savings can be huge. You will build equity in your home much sooner with a shorter term, and it makes sense if you plan on keeping your home for a long time. For example, refinancing from a 30 year term to a 15 year term could save more than $120,000 in mortgage interest on a $200,000 loan.
What about eliminating mortgage insurance?
Provided you have enough equity, refinancing can save money by eliminating unnecessary insurance. If you paid less than 20% for a down payment when you bought your home, then you are probably still paying mortgage insurance. The insurance is only for the benefit of the lender, and will be impounded in your monthly payment until you sell your home, or refinance at 80% loan to value, or less.
