How and Why You Get Your Money Back When Refinancing

 In Blog, Real Estate Questions

Refinancing your mortgage can be a great financial move. However, it can also be an expensive one.

When you take a new mortgage, which is the case when you are refinancing your home, you need to take into account some hefty fees. The closing fees, which average around 2% to 5% of the value of the loan itself, includes a battery of services your lender will provide before closing on the loan, such as the appraisal, the title search, the cost of recording, etc.

 

For many, paying this fee is very much worth it, especially if you are planning on staying in your home for a while. Here is how and why you get your money back when refinancing your home.

 

 

 

1. You can secure a lower interest rate

Getting a mortgage with a lower interest rate in the main reason why people choose to refinance their home. Paying less towards interest and more towards the principal could save you a lot of money in the long run.

 

If the interest rates have globally gone down since you obtained your first mortgage, it might be worth investing what you could save every month.

 

Some people choose an adjustable rate mortgage, which initially has lower interest rates. However, those rates tend to increase over time. If you are in this situation, switching from an adjustable rate mortgage to a fixed rate mortgage could be a wise financial move.

 

Finally, if your credit score has significantly improved since you bought your home, you may qualify for a lower interest rate mortgage. 

 

 

2. You can shorten the terms of your loan

It is not a typical move, but it is one that may help you get more than your money back from refinancing. By shortening the term of your loan, you will typically pay a higher monthly payment, but you will also pay less interest in the long run and get out of debt more quickly.

 

 

3. You can consolidate a high-interest debt

If you have incurred a significant amount of high-interest debt like credit card debt, refinancing your home could be an excellent way to consolidate your debt and lower how much you pay in interest rates to put more towards the principle.

 

Consider how much you are paying in interest every month and what your monthly minimum payments add up to before making this move. You will also need to keep in mind that you would be at risk of losing your home if you were to default on your monthly payments. Nevertheless, you could also save a significant amount of money every month and recoup your initial payment on closing costs in no time.

 

 

4. You can have access to the equity you built into your home

Finally, one of the significant advantages of refinancing your home that it allows you to bank in on the equity you built in your home over time without having to actually sell it. Some forms of refinancing give you access to a lump sum of money (cash-out refinancing) while others allow you to use the equity in your home as a form of credit card, using your home as collateral (home equity line of credit, or HELOC).

 

Many people choose to reinvest that money back into their homes and use the funds obtained to finance a home improvement project. Other prefer to invest in their education or that of their children via a college fund. Using the equity in your home allows you to bypass personal or student loans, which may have a higher interest rate, therefore saving you money in the long run.

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