Mortgage refinancing may come with great monetary benefits such as lowering the interest rate on the mortgage payment and even avoiding high interest rates on other loans. However, when careful consideration and analysis is overlooked, it may also add to the financial burden associated with mortgages, leading to a never-ending debt cycle.
Here are some factors to consider when refinancing your mortgage:
Lower interest rates and switching mortgage types
A lower interest rate – a 1% drop is considered significant – is a great incentive to refinance your mortgage. For starters, it translates to lower monthly payments, saving you a lot of money in the end. It is also a quick way to increase your home’s equity, further opening up better financial opportunities.
On the other hand, you may decide to switch between fixed-rate and adjustable-rate mortgages, depending on the most appealing one. This would be the one with a lower interest rate or better terms.
Shorter loan term
This directly depends on the change in the mortgage’s interest rate. Where mortgage refinancing is undertaken due to lower interest rates, you can opt to shorten the loan’s term without making significant deductions to the monthly payments. This comes as a relief to most people as long terms may be somewhat intimidating.
Accessing home equity and consolidating debt
Home equity comes in handy when making large financial payments such as paying your child’s college tuition or even improving your home.
In addition, mortgages are generally known to have lower interest rates than most other loans. This makes them a suitable option for people seeking loans as they get to save quite a lot of money in the end while also enjoying additional conveniences such as tax deduction.
However, in spite of these benefits, mortgage refinancing can come with some potential pitfalls. As such, it is always important to perform a proper analysis before refinancing to ensure that the benefits outweigh the costs.