What Are the Benefits of Refinancing Your Home?

The post What Are the Benefits of Refinancing Your Home? by Sarah Horvath appeared first on Benzinga. Visit Benzinga to get more great content like this.

Are you having trouble making your monthly mortgage payment or balancing debt and home insurance payments? Refinancing can be the solution to your mortgage woes. Let’s take a look at some of the benefits of refinancing — and how you can get started on your refinance with one of the best refinancing companies.  

5 Major Benefits of Refinancing

While refinancing a mortgage requires some upfront costs and effort, the potential benefits make it an attractive option for many homeowners.

Benefit 1: You Might Be Able to Secure a Lower Interest Rate

If interest rates are lower now than when you bought your home, you can often save thousands of dollars by refinancing. When you refinance your loan, you lock into today’s interest rates. Reducing what you pay in interest by even a fraction of a percent can save you a lot of money by the time you finish paying off your home.

For example, let’s say that you have a loan with a principal balance of $150,000, 20 years left on your term and an APR (annual percentage rate) of 4%. Now, imagine that today’s rates are around 3.5%. If you refinance your loan to today’s interest rate, you’ll pay a total of $58,785.50 by the time you pay off your loan. If you don’t take the refinance, you’ll end up paying $68,152.95. This means that by refinancing to a rate that’s just half a percentage point lower, you save over $9,300 by the time you own your home.

Mortgage interest rates change on a daily basis. Know your current interest rate and keep tabs on how rates change in your area. This can help you refinance when rates are lowest — and save you the most money possible. 

Benefit 2: Refinancing Allows You to Customize Your Mortgage Payment

A mortgage is a major commitment — you might make payments on your mortgage for 30 years or more. It’s totally normal for your lifestyle to change over the course of your mortgage term. Refinancing allows you to adjust your mortgage terms and payments to fit your current needs as a homeowner.

One of the most common reasons you may want to refinance your mortgage is to lower your monthly payment. When you refinance to a longer term, you lower the amount of money you need to pay to your mortgage company each month. Lengthening your term results in you paying more in interest by the time you own your home but it can be an excellent solution to help you stay in your home if you lose your job or you encounter an unexpected medical bill.

You can also shorten your mortgage term and take on a higher payment. When you shorten your mortgage term, your monthly payment will significantly increase. However, you’ll own your home sooner, and you’ll often save tens of thousands of dollars in interest. Shortening your mortgage term can be an ideal solution if you’re now earning more money than you were when you bought your home. 

Benefit 3: You Can Use Your Home Equity to Pay Off Debt

Most Americans have some kind of debt independent of their mortgage balance. From credit card debt to student loans, most people aren’t totally debt-free. If you have outstanding debt accumulating interest, you can save money and free yourself from additional interest accumulation with cash out refinancing.

A cash-out refinance is a special type of mortgage refinance that allows you to access your home equity. Equity refers to the percentage of your home that you actually own. Every time you make a payment on your mortgage loan, you build equity in your property by paying down your principal loan balance. You accept a higher principal loan balance with a cash-out refinance and your lender gives you the difference in cash.

Cash-out refinances are useful because mortgage loans offer one of the most affordable ways to borrow money. The average 30-year mortgage loan has an APR between 4% and 5%, while the average credit card has an APR of over 17%. When you take a cash-out refinance, you can pay down your high-interest debt and replace it with debt on your much more affordable home loan. This can save you thousands of dollars by the time you finally pay off your home.

Benefit 4: Get Ride of Mortgage Insurance

Mortgage insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the home’s purchase price.

If your home has appreciated in value since you originally purchased it, you may now have enough equity built up to meet the 20% equity threshold that allows you to avoid mortgage insurance on the new loan.

Refinancing could enable you to switch from an FHA or USDA loan, which requires mortgage insurance for the life of the loan, to a conventional loan that allows you to eventually cancel mortgage insurance once you reach 20% equity.

Benefit 5: Secure Funding for Home Improvement

By refinancing, you can tap into your home’s equity, which is the difference between the home’s value and the outstanding balance on the mortgage. The new mortgage loan can be structured to provide you with additional cash beyond what is needed to pay off the old mortgage. This “cash-out” portion of the refinanced loan can be used for various purposes, including funding home improvement projects or necessary repairs.

The cash-out refinance option is particularly advantageous if you have built up substantial equity in your home through mortgage payments and property value appreciation. By accessing this equity, you an obtain funds for renovations or upgrades without taking out a separate loan or depleting your savings. The money obtained through a cash-out refinance can be used to finance major projects such as kitchen or bathroom remodels, additions or structural repairs, which can enhance the home’s value and improve overall living conditions.

Is it advisable to have a clear plan for the home improvement or repair projects to ensure that the funds are utilized effectively and contribute to the long-term value and functionality of the home.

Refinance Requirements

Before you refinance, you’ll need to make sure that you meet your lender’s standards to get a new loan. Let’s take a look at some of the basic requirements you’ll need to meet before you can secure a refinance.

Your Current Home Equity

Most lenders won’t allow you to refinance 100% of your loan’s value. As a general rule, you shouldn’t expect to be able to refinance more than 80% to 90% of your loan.

Before you apply for a mortgage refinance, you need to ensure that you have enough equity in your property to qualify. Contact your current lender and request a mortgage statement. Your mortgage statement will tell you how much of your principal you’ve paid down and how much equity you have. If you have less than 10% equity in your home, you’ll have a harder time finding a company for refinancing.

Your Credit Score

Every lender sets its own standards for the minimum credit score you’ll need to qualify for a refinance. Most lenders set this minimum at 620 points or higher. The good news is that if you’ve been making your mortgage payments on time, your score is likely higher than when you first got your loan.

Your Home Appraisal

Refinance lenders can’t offer you more money than your home is worth. You’ll typically need to pay for a new appraisal when you get a refinance.

Your Income and Assets

When you refinance, you usually pay off your current loan and take on a second mortgage loan with a new lender. Your new lender needs to know that you have the means to continue making your mortgage payments after it services your refinance. When you apply for a new loan, your lender will require you to submit much of the same financial information as when you got your original mortgage loan. Expect your lender to ask to see:

• Your last 2 bank statements
• Your last 2 W-2s
• Your last 2 pay stubs

If you’re self-employed, your lender will usually ask you for additional financial information. 

Refinance Rates

Refinance interest rates change on a daily basis. Let’s take a look at some of the currently-available rates you’ll find from some of the country’s largest mortgage lenders.  

*current rates as of 6/17/24 based on a 30-year fixed conventional mortgage

Best Mortgage Lenders for Refinancing

Do you think that refinancing might be right for you? Let’s take a look at some of the best refinance mortgage companies you can work with. 

Refinance the Right Way

Getting started with a refinance doesn’t need to be time-consuming or complicated. Begin by getting a quote from your refinance company of choice. Don’t be afraid to leave yourself plenty of time to “shop around” for lower interest rates or fees. Find the most affordable refinance possible — understand all your options. 

Frequently Asked Questions

The post What Are the Benefits of Refinancing Your Home? by Sarah Horvath appeared first on Benzinga. Visit Benzinga to get more great content like this.