On August 7, 2013, President Barack Obama sat down with Zillow CEO Spencer Rascoff to answer housing questions from American homeowners. During the conversation, President Obama mentioned that he would probably benefit from refinancing his Chicago home. The president says that refinancing would benefit his mortgage interest rate, allowing him to save money on his monthly payments. If the president can save money on his monthly payments by refinancing, could you reap the same benefits?
How you could benefit from refinancing
By refinancing your home, you could switch out your current loan for a new mortgage that includes better terms. Take a look at these five ways a refinance could save you money in a variety of ways.
- You could use your home’s current equity to fund home improvement projects or pay off debt. With a cash-out refinance, you can tap into your home’s current equity to help pay for home projects, fund your child’s college education or even pay off debt. For example, if your home is worth $500,000 and the current mortgage balance is $350,000, you could refinance your mortgage down to $400,000, leaving you with $50,000 to spend however you wish. You’ll receive the lump sum of money when the deal is closed so you can pay off debts, increase the value of your home with improvements or fund college for your kids.
- Refinancing can help you pay off your mortgage balance sooner. If you plan to stay in your home for good or you’re retiring soon, paying off your mortgage balance sooner can save you money on interest in the long run — with added benefit of owning your home. If you now have a higher cash flow than previous years due to paying off a car, receiving an inheritance or getting a significant raise at work, you could refinance your mortgage down to a shorter loan. Switching from a 30-year loan to a 15- or 20-year loan will raise your monthly payments, which you can cover with your increased cash flow. The higher monthly payments will allow you to pay off your home at quicker rate.
- You can build equity quicker by refinancing. Much like paying off your mortgage sooner, you can also use an increased cash flow to build equity quicker by refinancing down to a 15- or 20-year loan. You’ll build equity in your home at a faster rate and save money on financing fees — all without paying a huge amount of money each month.
- Refinancing could lower your monthly mortgage payments. Are mortgage rates currently lower than when your home was originally financed? Did you decide on an adjustable rate mortgage with a lower interest rate than the current rate? If so, you could save money on your monthly mortgage payment. Even if you refinance your mortgage from a 15- or 20-year loan to a 30-year loan, your monthly payments will significantly decrease.
- You can fix your interest rate by refinancing. If you currently have a variable-interest or interest-only mortgage, your monthly payments are going towards interest instead of the chief principle balance of your mortgage loan. With a fixed interest rate mortgage, you’ll know what your monthly mortgage payments will be for the foreseeable future and you’ll be able to pay both on the interest and the chief balance of your mortgage.
Refinance sooner rather than later
If you’re thinking about refinancing, it’s wise to do so sooner rather than later. As the economy strengthens, mortgage interest rates will start to rise again. For now, rates will continue to dip slightly before going up again as the economy gets better. To be eligible for a refinance, you must be up to date on your mortgage loan payments and have a strong credit history. When you’re ready to refinance, consult with a good mortgage financing company that can help you get started on the refinancing path that will best benefit you.