Some loans use your home as collateral. Refinancing, on the other hand does not. With equity in your home, refinancing is the smartest way to consolidate your debts. Refinancing replaces your existing loan with another lower interest rate loan for the same amount, saving you money. Refinancing can be used to reduce your interest rate, change the term of your loan, or to consolidate your debts. So you get one monthly payment and one low interest rate. If you have lots of equity and good to excellent credit, then this is your best option since the interest rates are lower than any of your other consolidating options.
With cash-out refinancing you refinance for more than you currently owe on your mortgage, and keep the extra cash. It may be advantageous to for you to refinance so you can “cash-out” and pay off other debts or make investments. You’ll need to look at the cost of refinancing to determine if it will help you to pay off your debts. Consider both the closing costs and the points you’ll pay for a lower rate and funds associated with paying off your existing loan.
For example: Let’s say you owe $70,000 on a $170,000 house. You want to refinance for a lower interest rate, and you also need $30,000 cash for graduate school. You can refinance your mortgage for $100,000. This way you will get $30,000 cash that you can spend as needed, and better rates for your mortgage payments.
Refinancing can save you money every month by reducing your current mortgage interest rates. With interest rates the lowest they’ve been in decades, now is the time to find out more. If you plan on staying in your home long enough to cover the refinancing costs (3 to 8 years) you stand to save substantially in the long run.
As a rule, you’ll benefit from refinancing when the interest rate is 1 1/2 percent lower than your current rate. But, you should also consider how long you plan to own your residence. You may have large monthly savings from refinancing, but you also must pay for closing costs of the loan including title insurance. Closing costs are usually 1–2% of the loan. It is beneficial to refinance when your closing costs are recovered over the life of the new loan.
An easy way to determine whether or not refinancing your mortgage will save you money is to divide your closing cost by the number of months you plan to keep your home. Then, add this amount to the principal and interest payments of your new loan. If your final result is less than your current mortgage payment, then refinancing will benefit you.
(closing cost to refinance / number of months in house) + (new loan principal + payment) = TOTAL
If your TOTAL is less than your current mortgage, you should refinance.
Keep in mind that the cost to refinance should be recoverable over the remaining term of the loan--That is, the remaining number of years you intend to own the property, not the number of years left on your current mortgage loan.
Contact Diamond Peak Mortgage for more information about refinancing your mortgage.