By: Chris Klau
While lowering your interest rate on your home loan and saving money on your monthly mortgage payment is a good reason to refinance, it’s not the only one. Your home loan, if used properly, can help you achieve greater financial freedom and flexibility. It can help you accomplish life goals like going to college, buying a vacation home or retiring early.
The key to unlocking these opportunities is considering your mortgage as part of your overall financial picture. Just as you might manage your credit, budget your money or monitor your investments, you should also check in regularly with a home loan expert you can trust to make sure you’re mortgage is in good shape.
Keep in mind that in order to qualify for a refinance right now, your current home loan should be in good standing and your credit score needs to be north of 620. To qualify for the best interest rates and terms, you’ll want to shoot for a credit score over 720. Not sure what your credit score is? You can take a peek at your score for free at Quizzle.com.
Among the reasons to refinance are:
Lower Your Monthly Mortgage Payment
Maybe your budget could use a little wiggle room. Or perhaps you need to reallocate your money for a major life event like a new baby, impending retirement, kid’s college fund or other investment opportunities. Securing a lower interest rate and saving money on your monthly payment can help you do that.
If you refinance to take advantage of a lower rate and your loan doesn’t carry a pre-payment penalty – a fee that some lenders impose if you pay off your loan early – you can also choose to pay off your loan faster by making the same monthly payment you were previously.
Looking for even greater flexibility with your monthly payment? You may want to consider refinancing into a loan with a longer term, e.g. moving from a 15-year fixed-rate mortgage into a 30-year fixed-rate mortgage. By lengthening your loan term, you can lower your monthly payment. And if you can secure a lower interest rate at the same time, you can really free up some cash.
Some folks need payment flexibility for a few months out of the year – perhaps if your work is seasonal or commission-based – and others need the change indefinitely. Either way, make sure you’re taking a loan with no pre-payment penalty so you’ll have the option to pay off your loan faster by paying more than your minimum monthly payment, if you so choose.
Pay off Your Home Loan Faster
If your mortgage feels more like a burden than a financial tool you can use to achieve other life goals, you may want to consider refinancing into a loan with a shorter term. In most cases, this results in a higher monthly payment, but will allow you to pay off your loan faster.
Because interest rates are historically low right now, you may be able to refinance into a shorter-term loan and still keep a similar monthly payment to your current longer-term loan. Snagging a deal like this would allow you to pay off the loan faster and decrease the total amount of interest you’ll pay over the life of the loan – and that decreased interest can add up to a staggering amount in many cases!
Pay Down Debt
If you have high-interest debt, like credit card debt, you may want to consider refinancing and using the available equity in your home to pay off your cards. Unlike credit card debt, mortgage debt typically carries a lower interest rate and the interest is tax-deductible.
Using the equity in your home to consolidate your high-interest debt into a low-interest mortgage will give you increased payment flexibility and the opportunity to better package your total debt, making it easier to get rid of it. If you’re investigating this route, make sure to work with a knowledgeable home loan expert that can guide you through the decision-making process so you can feel confident it’s the right move for your overall personal financial situation.
Take Cash out
You can also tap the equity in your home to take cash out for a variety of purposes: building a rainy day fund or increasing savings, college tuition, retirement funds or home improvements. In this scenario, your overall mortgage balance will increase and you’ll receive money back at closing.
If you’re going to use funds from your refinance for home improvements, make sure to consider the projects you have planned very carefully, as some improvements will give you more bang for your buck than others.
There are all kinds of reasons to refinance your home loan. By managing your mortgage around life changes and market movements, you’re in a better position to achieve overall financial success. Just make sure you have an experienced guide to walk you through your options and provide you with all the information you need to make a wise decision.
For more tips about your home, money and credit, plus free tools to help you make the most of them – including a free credit score, home value estimate and home loan recommendations – check out Quizzle.com.
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- Why You Shouldn’t Wait for a Lower Rate on a Home Loan
- 55 Money Saving Tips (Your Wallet Will Thank You)
Chris Klau has nearly 10 years of experience in the mortgage industry as the Director of the Mortgage Insiders at Quicken Loans, a team dedicated to providing home loan advice and solutions to team members, friends and family, and external partner companies.
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