Mortgages are the biggest form of debt you will take on in your life. According to a study from NerdWallet, the average U.S. household has $168,614 in mortgage debt.
This high amount is not necessarily bad because obtaining a mortgage means you were able to purchase a home. It's not until you become a homeowner that you can truly call a piece of property your own.
A majority of homeowners take out a 30-year fixed rate mortgage because the stability of monthly payments is an attractive option. When you have a long-term mortgage, your monthly payments in year 30 will be the same as they were in year 5. This also means the interest rate you secure when signing the loan will stay the same.
But over the lifespan of a mortgage, the market is guaranteed to change, which will have an effect on interest rates. At some point, rates might fall, which new buyers can take advantage of. Luckily, through the help of refinancing, you too can also potentially enjoy lower rates.
Refinancing is a process that also offers more options for homeowners that may not be as well known.
What is refinancing?
Overall, refinancing is when you apply for a new loan that can help you save money, provide you with more financial flexibility or a combination of both. Essentially, the new mortgage is being used to help pay off the original loan.
You can also access some of the equity that's built up since you've purchased the home. Refinancing can also help you move from an adjustable-rate mortgage to a fixed-rate, and vice-versa.
However, you will have to be absolutely certain you want to refinance because there are a lot of steps involved, such as title search, appraisal and application fees. It's important to note that when refinancing your mortgage, you'll add more years to the time it takes to pay the loan back.
You should ask yourself three questions before committing to a refinance:
- What are the costs of getting a new mortgage?
- Can tax savings be lowered?
- How much, if any, is the prepayment penalty for the original mortgage?
Lower your interest rates
As a homeowner, you are likely always looking for ways to save money. By paying less in interest, you're able to divert more resources into savings accounts or into a retirement fund.
To help you achieve lower interest rates, you can take advantage of rate-term refinancing, according to Bankrate. When you choose this option, one loan is paid off with a new one.
As you're looking for lower interest rates, you can also decrease the number of years on your mortgage without much change in your monthly payments. Doing so can help you save on interest but cut the 30-year mortgage in half.
Once you become a homeowner, your property becomes a valuable financial asset. But over the course of a 30-year mortgage, there may come a time where you wish to take advantage of lower interest rates.
Refinancing gives you that opportunity.
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