Purchasing a house is an important occasion. Unless you're a real estate investor, it's unlikely that this will happen more than once in your life. Many individuals, however, refinance their homes at some time.
Homeownership is a source of great pride for many people. It's an important financial tool since your house is an investment for the future. You can use it to assist your financial position in certain situations if you refinance it.
As a matter of fact, 1 in 4 homeowners have refinanced their homes in the past five years.
The Six Reasons Why People Refinance:
- To get bet a better interest rate: This is the most popular reason to refinance.
- To shorten the loan term: You can save a great deal of money in interest payments by doing this.
- To take cash out: Homeowners will sometimes do this to make improvements on their home or consolidate debt.
- To borrow against the home equity: You can get a home equity line of credit or a home equity loan.
- To change loan type: This protects you from future interest rate hikes or unforeseen employment circumstances.
- To remove a co-signer: If you have improved your credit score or income, you may be able to remove a co-signer.
It's quite likely that you'll find yourself in one of these six situations. Even if someone took a 30-year mortgage to buy their house for the first time, they may not be on their first loan after thirty years.
For most individuals, there's no reason to consider refinancing right after they purchase their home. However, it's always worth keeping in mind that you have the option available to you. Situations do change, and sometimes it's advantageous for you to refinance even though you just got a house.
Let's drill deeper into the six reason above:
To Get A Better Interest Rate:
This is the most popular reason to refinance and it makes a lot of sense. If you can get a lower interest rate, you will save money on your monthly mortgage payment. This will free up cash that you can use for other purposes such as investing or paying off debt.
Hypothetically let's say your current rate of 5.5% and rates drop to 3.5%, your next phone call should be to your mortgage broker. A broker is able to shop your rate through various lenders and a good mortgage broker will be able to walk you through the costs associated with the refinancing and the savings potential. There
To Shorten the Loan Term
The second reason people refinance their homes is to shorten the loan term. The most common mortgage terms are 30 years and 15 years. For instance, if your income increases significantly and can afford to pay more monthly to lower your rate.
By doing this you would have more equity in your home and end up fully owning your home quicker.
To Take Cash Out
Homeowners will sometimes do this to make improvements to their home, consolidate debt, pay for education, or any other reason you would need the cash for. By consolidating debt, you can often get a lower interest rate which will save you money each month.
There should be a lot of considerations when doing this because your primary goal should be to pay off the home and save money for later for your future.
To Borrow Against Home Equity
You can get a home equity line of credit or a home equity loan. A home equity loan is where you borrow against your home's value and make monthly payments. A home equity line of credit is where the bank gives you a line of credit that you can use when needed and only pay interest on the amount you use.
This can be a good option if you need cash for a one-time event such as home improvements, education, or medical bills.
Just remember that if you're not able to make the payments, the bank can foreclose on your house.
To Change Loan Type
This protects you from future interest rate hikes or unforeseen employment circumstances. For example, if you have an adjustable-rate mortgage, your interest rate could go up in the future and you would be stuck with a higher monthly payment.
If you refinance to a fixed-rate mortgage, your interest rate will be locked in for the life of the loan and you'll have peace of mind knowing your monthly payment will never change.
Let's say you're in a 15-year fixed mortgage and you just recently took a decrease in income that would make making the monthly payments stressful. You could potentially switch to a 30-year fixed mortgage to help reduce your monthly payment amount could be an option.
To Remove a Co-Signer
You may have had bad credit in the past and needed someone with a better credit score to co-sign with you to get the mortgage.
If you have improved your credit score or income, you may be able to remove a co-signer. This can be helpful if you want to qualify for a lower interest rate and remove the responsibility from the co-signer.
These are the top six reasons people refinance their homes. As you can see, there are many different reasons why people refinance and each situation is unique. It's important to sit down with a mortgage broker to discuss your options and figure out what makes the most sense for you.
If you're looking to save money, pay off your home quicker, or borrow against your home equity, refinancing may be a good option for you.
What reason do you have for wanting to refinance your home? Give us a call we’ll love to talk it through! Thanks for reading!