So, you bought a home and have been paying your mortgage for a couple of years.
Now you’re wondering if you could be in trouble since interest rates are on the rise. Or perhaps you’ve run into cash flow problems and are looking for a way to ease your budget.
Depending on your situation, refinancing your home may help you make the most of your finances. Here are six ways you can use a refinance to your advantage this year.
1. Lower your interest rate
If you didn’t qualify for the best rates when you originally bought your home, refinancing could mean big savings. Especially if you’ve made smart moves to improve your credit score.
That’s because one of the biggest benefits of refinancing is the chance at getting a lower interest rate. Which in turn can save you quite a bit over the course of a loan, depending on the difference.
For instance, if you got a mortgage for $225,000 in 2013 at 4.57% APR and you refinance $210,000 in 2017 at 3.87% APR, you can save $7,737 over the life of your loan, assuming refinance fees of $1,000, according to this calculator from Zillow.
Always remember to take a look at the savings when you take advantage of your higher score by refinancing to a better rate before deciding if it’s the right course of action for you.
2. Improve your cash flow with a lower payment
A lower interest rate isn’t the only way to benefit when refinancing your home mortgage. You can also end up with a lower monthly payment, which can improve your cash flow each month.
Sometimes it’s more about cash flow than anything else. If you need a little more breathing room, refinancing to a lower payment can be a big help.
3. Get rid of mortgage debt faster
The reality of refinancing with a 30-year loan is that you actually end up with your debt for longer. So if you have 20 years left on your home loan and your refinance using a 30-year loan, you’ve just added 10 years to the life of your debt.
However, one of the benefits of refinancing is that you have the option to choose to do so with a shorter term, allowing you to get rid of debt faster. And in many cases, a 15-year mortgage has a lower interest rate than a 30-year loan.
Using information from the first example, you can see a savings of close to $100,000 over the life of the loan when that exact action happens.
The downside to refinancing to a 15-year loan is the fact that you end up with a higher monthly payment. However, the savings can be huge. If you are sure you can make the higher payments, it can be worth it — if paying down debt quickly is your main concern.
Another alternative is to refinance to a 30-year mortgage, but work to pay off the loan in 15 years. This gives you wiggle room if you can’t make a higher payment, while allowing you to aggressively tackle your mortgage debt. But, you most likely won’t see the same low rate as a 15-year mortgage.
4. Lock in a fixed mortgage rate
Maybe you have an adjustable-rate mortgage.
If this is the case, you might be worried that mortgage rates will go up. Especially since a higher rate means a newer, higher monthly payment. Now might be the time to lock in a fixed mortgage rate by refinancing.
In some cases, you might have a slightly higher rate initially. However, if rates continue to rise, you’ll be glad you locked in a fixed rate now, instead of being subject to a higher rate later.
You do run the risk of missing out on savings if rates drop again. However, due to the low-rate environment we’re in now, it’s unlikely that rates will be much lower any time soon.
5. Cash out
Have you built equity in your home?
One of the benefits of refinancing is that you can access the value you have accumulated in your home over the years. And a cash-out refinance allows you to borrow more than you owe and keep the difference.
Say for example you owe $150,000 on your home. However, your home is worth $220,000. That means you have $70,000 equity in your home. And a portion of that can be tapped during a home refinance.
You won’t get that whole $70,000 in cash, though. Most mortgage lenders only let you borrow up to 80 percent of your home’s value.
In this case, your maximum refinance amount would be $176,000. And once you pay off the $150,000 balance on your original mortgage, that leaves you with $26,000 in cash.
Many people use this cash for weddings, education, or even vacations. But before you cash out for any of these expenses, make sure it’s worth the cost.
And remember, you will have to pay interest on the loan. Plus, you’re putting your home at risk. Therefore, carefully consider whether you can handle the payments before you make your move.
6. Pay off debt
One version of the cash-out refinance is debt consolidation. Essentially, you use the equity in your home to pay off your high-interest debt.
On one hand, this is helpful because it means a much lower interest rate. Plus, in most cases, the interest you pay on a mortgage is tax-deductible. You can pay down your debt at a lower rate and save money.
However, you have to be careful with this move. First off, it means you’re extending your consumer debt out 30 years. Next, you are securing your debt with your home. So if something happens and you can’t make payments, you could lose your home over your consumer debt.
Finally, you run the risk of getting into more debt. If you aren’t careful, you might run up new bills on your recently-cleared-off credit cards. This puts you in an even worse position.
Carefully consider before refinancing your home
Before refinancing your home, carefully think about the situation.
Be sure that it’s the best move for you, and that you’re doing it for the right financial reasons. When done properly, you can reap the benefits of refinancing to save money and smooth your cash flow.