Home refinancing can be a significant move to ponder when you are thinking of saving some money. However, refinancing can be very tricky as you may end up in a worse financial situation with little cash in the bank. Therefore home refinancing makes sense when there is a possibility of you saving some money.
Refinancing at lower interest rates
Mostly home refinancing is considered when interest rates have reduced as it will allow you to pay less interest in the life of your mortgage. When interest decreases, then house refinancing to reduce the term of the mortgage can help you save on money as you will be required to pay less in interest rates. Normally the interest is what makes the cost of mortgage repayment to go up so if the rates reduce refinancing will help save some cash. Refinancing will reduce the interest you pay as well as enhance the rate of equity building, thus reducing the amount you pay per month.
For instance, if you have a $380, 000 home mortgage with a down payment of 20% and an interest rate of 4.625% for 30 years, you will be paying $1,563 per month. But if you reduce the interest rate by 1% through refinancing your monthly payment will be $1, 386 and this will save you around $2, 124 annually.
Refinancing to shorten the loan term
You can refinance your mortgage to shorten the loan term. In the bulk of repayment of a 30-year mortgage in the first 15 years is normally are on interest. Refinancing your home mortgage to reduce the term of your loan can save you a considerable amount of cash as you will be required to pay reduced interests over the term of the loan. Sometimes you can save even more if at the time of your refinancing there is a lower interest rate.
Considering your equity amount
When considering home refinancing, you have to be mindful of the amount of equity in the home. Normally 20% of equity is preferred for you refinance, and if you have at least 20%, then you have higher chances of getting a good deal. If your home equity is decent then when refinancing, you will save a considerable amount of cash as you will be in a position to refinance at a lower amount relative to the principal loan amount. As a result, this will reduce the amount that you are required to repay each month since you will be servicing a smaller loan.