Benefits of Refinancing your Home

The basic idea behind refinancing a home is changing the profile of your home loan. When you refinance, you can lower your interest rate, lower the monthly payment, extend or decrease the term of the loan along with many other things. Generally you want to refinance only if it will put you in a better financial position, though sometimes refinancing to take advantage of your home equity does have merit as well. If you are a home owner the following information should help you better understand the benefits and draw backs of home refinancing.

 One of the primary benefits of refinancing comes from lowering your interest rate. In simple terms, your home interest rate is the money you are being charged by the company you borrowed the money from to pay for your home. Essentially, the lower your interest rate, the less money you have to pay over the term of your loan. This means that if you refinance to a lower interest rate than the one you originally started with you could save yourself tens of thousands of dollars over the life of your home loan and when done right, lower the monthly payment as well.

 For example let’s assume you bought your home for $150,000 at an interest rate of 9% on a thirty year term. Your monthly payment would be $1206.93 a month. To keep this example simple we are now going to assume that you want to refinance the same $150,000 loan down to the current thirty year fixed rate of about 5%. your new monthly payment is now only $805.23 which is a very significant savings in money. Not only have you saved yourself about $400 a month, but you also are not paying near as much money in interest either.

 As the above example shows, another benefit of refinancing can come from reducing your monthly payment. An interesting thing to note about this is that there are times when you can actually increase your interest rate while decreasing your monthly payment. This often requires you to have owned the home for quite some time and then refinancing into a new thirty year loan and is not recommended unless you really need to find a way to keep your home affordable.

 Another common benefit of refinancing is taking advantage of a homes equity. This can range from pulling money out to pay for a home improvement project to financing your child’s college tuition. In essence you get a new loan on your home with some of this money being used to pay off what you still owe on your original loan and using the rest of the money to do whatever you wish. While this is commonly achieved by adding a second mortgage onto the home, it can be done simply by refinancing your first mortgage as well.

 Recently the most popular benefit of refinancing has been debt consolidation. Let’s say that you owe twenty thousand dollars in credit card debt, another fifteen thousand dollars in car loans, and a second mortgage with about ten thousand dollars. Each of these loans is being paid at a much higher interest rate. By refinancing your debt into a single low interest home loan you can potentially save yourself hundreds of dollars a month and also get out form under burdensome debt.

 There are other benefits to refinancing as well, but these tend to be more of a specialized market. Things such as increasing or reducing the term of the loan, consolidating multiple loans on many different homes, and financing other investment opportunities can be achieved through refinancing. However, always make sure that you keep your mortgage manageable because recent history has shown us that even the traditionally stable home market can be rocked on occasion.