If you’ve heard of mortgage refinancing but never really understood it, allow us to give you the simplest explanation for it – it’s paying off your existing mortgage with money from a new mortgage. We know you’re wondering how that would help since you’re still in debt, but the catch lies in the interest rates. The rates on refinanced mortgage are quite less as compared to regular mortgage rates.
As of July 2020, home mortgage rates hit a record low. With the pandemic in place and economic recession hitting the US, refinancing of mortgage has been the order of the day. According to the Mortgage Bankers Association, the refinance applications of 2020 are 111% higher than that of 2019.
Keeping that in mind, we’re letting you in on what you stand to gain if you decide to do this.
IT REDUCES THE LIFE OF YOUR LOAN
If you plan to refinance a 30-year mortgage into a 15-year loan, your monthly payment will likely shoot up. That’s not all; it will reduce your repayment period also, helping you clear your house debt sooner, and thus, you’ll be able to save some cash on the accumulated interest.
Here’s a sample scenario – suppose you currently have a 30-year mortgage of 150,000 dollars at 4% interest with a monthly payment of $716. The total interest of that loan will be $108,000. If you refinance the mortgage into a 15-year loan at 2.75% interest, your monthly payment will be high (about $1,020), but it will help you lessen the time to pay off the loans. You will end up paying about 33,000 dollars as interest, which is like saving $75,000!
IT SLASHES YOUR MONTHLY PAYMENT
Okay, so you don’t want to pay an extremely high amount every month, we get it. In such a case, getting refinancing at a lower interest rate than what you’re currently paying can help you cut down on your monthly payment. Let’s say you have 150,000 dollars left on your mortgage with 4% interest. The principal and interest on the loan will add up to about $720 in monthly payment. If you source for another mortgage and you get one at 3% interest, your monthly payment should be around $625. You do the math!
BENEFITS OF EXCELLENT CREDIT SCORE
It’s been discovered that mortgage lenders consider your credit score before they give you an interest rate. So, the higher your credit score, the more favorable the loan you will get, and that too, at a lower interest rate and lower costs.
The main aim with which you’re venturing into mortgage refinancing is to reduce the amount of interest you have to pay. But that doesn’t mean this is the only option. If you’re unable to see a way to reduce the loan, back away from refinancing. If you won’t stay in your house for at least two years, then you don’t need refinancing, right?