Home refinancing decisions are generally based on market influences on the housing industry, and what effect they have on current mortgage interest rates in particular. When the overall economy is sluggish, the interest rates on home loans are proportionately lower as well. Any homeowner with a fixed-rate or adjustable rate mortgage drawn up a few years ago will consider the benefits of refinancing while interest rates are in their current downward swing. The motivation to refinance is to take advantage of this trend by re-placing the old mortgage with a more budget-friendly monthly payment and a lower interest rate.
Three Benefits to Refinancing
Refinancing a current mortgage can save considerable money if it is done at the right time and for the right reasons. In a refinancing plan, there are usually three significant benefits that play a major role in the decision, depending on the long-term goals or current economic factors affecting the borrower.
- Decreasing Monthly Payment Amount – Lower mortgage interest rates will significantly reduce the amount the homeowner will pay each month, often by hundreds of dollars. However, this formula needs to be weighed against the long-term effects of extending the term of the original loan further out, which means much more interest being paid out over the life of the loan.
- Decreasing Loan Term – A shorter term will result in far lower overall costs, as well as having the loan paid off that much quicker. While the interest rate applied will be a few percentage points lower, this advantage may be offset by the monthly payments being somewhat higher because of the shorter loan term. However, the less paid toward interest, the more is paid toward the loan principle.
- Accessing Home Equity – Tapping into home equity provides the borrower with funds to utilize toward any immediate financial need or cash requirement. Many factors will influence the overall benefits of this decision, such as the monthly payment amount, loan term, interest rate, and current mortgage pay-off amount.
If refinancing turns out to be the best option for you and you have decided to move forward with the refinancing process, you have ample benefits to look forward to. Want to learn more about refinancing? Here are some articles we suggest: Should I Refinance My Home, Top 10 Refinancing Tips, and Best Mortgage Refinancing Indicators.