Refinancing is replacing your current loan by paying it off with a new loan, and there are many reasons to consider refinancing. Before you do so, it is important to decide if the benefits outweigh the cost of the new loan. In particular, take a look at current rates, your current financial needs, and the fees associated with refinancing. With some due diligence, refinancing can be beneficial for any of the following reasons:
- Consolidate Debt: You might find that over the years you have acquired several debts. You may now have a mortgage, a car payment, credit card debt, and possibly a personal loan. It may be easier to pay off these multiple debts and only have one payment each month. Consolidating debt can help you get organized and possibly get a better rate since unsecured debt often carries a high interest rate when compared with a mortgage.
- Save Money: Rates are ever changing; when they are lower, you might want to consider refinancing, as it can potentially save a significant amount of money over the life of your loan. Even if rates have not gone down, perhaps your credit score has improved and you can qualify for a better rate. If you want to maximize your savings, consider refinancing at the lower rate with your current loan term, meaning you are not adding years onto your loan’s term. In some circumstances you might think about refinancing with a longer term even though the rates have not gone down. This can help you lower your payments and lighten your financial burden at the present time.
- Cash Out: Got home improvements? How about college tuition to pay? If so, a cash out refinance might be the right fit for you. Cash-out refinances offer the ability to access the equity in your home and use the cash for other purposes. For example, if you owe $100,000 on a home that is worth $250,000 you could do a cash-out refinance and get $50,000 in cash. Your current mortgage would then be replaced with a new mortgage of $150,000. Borrowers most commonly use cash out refinances for nonstructural improvements to their homes such as updating bathrooms or renovating the kitchen. Other popular uses might be buying a car, paying college tuition, or any other large expense.
If any of these situations speak to your needs refinancing could be a great decision.