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.
I have an investment property (SFR) bought in 2005, by paying 20% down from my savings and balance with bank loan @5.75% interest. I have tenant some times and I do not have a tenant most of the times. I am loosing money big time. Can some one please advise as to what options do I have concerning this property: If I want to sell the property, difficult to find a buyer, even if I do find one I may end up loosing money (house is not worth what I paid for). Is it smart to pay off the loan by borrowing money from family and friends?
Appreciate any ideas.
I have tried to get an answer from several people.I am on SSD and my husband is on unemployment.Why cant we refinance?Alot of people in are area has lost their home because of this.So alot of people dont benefit from this.We still half to servive. Please reply. THANK YOU
what about the people that pay their mortgage on time never late but they like to refinance.they dont make enough money are they qualify for loan mordyfication.
First, I think you should consider if there is anything you could do to make the property more easily rentable. Are there any inprovements needed to the property? Do you need to throw in some freebies, reduce rent, etc? Second, can you refinance the loan to a lower rate loan or increase the tenure of the loan?
Venkat,
First let me tell you I am sorry your investment property has left a sour taste in your mouth. The housing market has really impacted everyone.
I would never recommend borrowing money from family; especially if you feel the potential for selling at a loss and won’t be able to repay the loan. If this is the course you take, I would recommend a short sale to the family member or making them a part owner depending on the amount of money they loan to you. If you take them on as an investor; sit down with them and define each others roles and objectives. It is like a marriage counseling (do you want kids, how many, disciplinary actions for kids, what religion, schools and to what grade level).
Another option would be to take on another investor, who is not a family member. This will keep peace in the family in a worse case senario (such as foreclosure). Just like with a family member, I would highly recommend sitting down with this partner too and discuss your roles and responsiblities.
If you would like to retain this property or in the interim until the property can be sold, I would highly recommend hiring a property management company. A good one can really reduce your headaches. Word to the wise…shop around! There are bad and good ones out there. Don’t pay if it is empty, expect to pay 7-10 percent, and allow them at least 90 days to get it rented. Don’t forget to do your part as the owner. If you plan on doing cleaing and reapairs to save moneny…get in and get it done.
Remember, depending on the housing market in your area, you may be able to increase your rent to offset the fees and the fees are tax deductible. So don’t let the fees scare you. Besides, I would rather take a loss (which tax deductible) on a couple of hundred dollars a month verses thousands over several months.
Just a few thoughts. Sorry, I can’t help you more without having more details. Best of luck to you. If you would like to talk more, send a e-mail to mbpritchard@hotmail.com.