Two Important Benefits of Mortgage Refinancing

Two Important Benefits of Mortgage Refinancing
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    Refinancing your mortgage can save you money, by enabling you to switch to a lower interest rate home loan.


When done right, you can save thousands of dollars in interest costs over the life of the loan, money you can use instead for your retirement, to pay for college or toward making a major purchase.

Benefit No. 1 — Lower Interest Rate

An old rule of thumb insisted that you should not consider refinancing your home unless the new mortgage rate was at least two percent lower than your current rate. The reason for that thinking is that closing costs would never be recouped if the rate difference was one percent or less.

These days, experts are no longer embracing the old rule. Instead, you may be advised to shop for a loan where closing costs are reduced or waived.

Even a one percent interest rate difference can save you plenty. For instance if you have a $250,000 mortgage at 5 percent with 20 years left on your mortgage and you’re able to lower that rate to 4 percent, you will save approximately $32,000 in interest over the life of the loan. Use a mortgage calculator to determine the potential savings.

Benefit No. 2 — Reduce Your Loan Term

For some homeowners, getting out of debt faster is their goal. One way to do that is to switch from a longer term mortgage to a shorter term mortgage. For instance, a 30-year mortgage could be replaced with a 15-year mortgage.

The shorter term mortgage may be within your reach if two factors apply to you:

1. You’ve been making payments for several years and have made a significant dent in your first mortgage. For instance, you may have lived in your house for eight years, leaving 22 years left on your original mortgage.

2. Your income has increased significantly and you’re able to handle the higher monthly payments that a shorter-term mortgage requires. That salary increase may be a result of a promotion or a new job.

Keep in mind that even though your monthly payments will be higher, the interest rate for a short-term mortgage is usually lower. Ultimately, you can save tens of thousands of dollars in interest payments by choosing the shorter loan.

Mortgage Considerations

Consider refinancing if you plan to stay in your home for the long term. If not, you may never recoup your closing costs, which add a three to five percent fee on top of your loan. You may be able to get these costs reduced or waived, but likely you will need to come up with some money as you refinance.

Mortgage rates are expected to trend higher in the coming years, therefore shopping for a home loan now with a fixed interest rate can help you lock in savings for the long haul.

See AlsoHow to Refinance Your Home



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Categories: Financing

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Auto Trends Magazine", an online publication. Matt covers campus, consumer, business and financial topics on various websites and weblogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".