Refinancing Your Mortgage – Hidden Benefits

Key Takeaways

  • The benefits to refinancing your mortgage are savings on interest over time, getting rid of Private Mortgage Insurance (PMI), receiving cash for the difference, and using the savings from the reduced monthly mortgage to pay off other debts or save money.
  • Consider refinancing if it takes 1-2 years to break even on the closing costs versus monthly savings, if the new interest rate is a ¼ % lower or better, you have a credit score of 740 or greater, and you’ve got all the necessary documents for loan underwriting.
  • The goal of refinancing your mortgage is to get the best terms and the best interest rate.

There are many reasons why people shy away from refinancing their mortgages. Sometimes they think closing costs are too high, or they’ll say their lender doesn’t want them to refinance, or they think it’s just too much time, hassle and effort. Those are all real considerations, but there can be a lot of benefits to refinancing your mortgage. Why would you refinance your mortgage?

  1. Huge savings on interest expense over the long term
  2. Private Mortgage Insurance (PMI) might go away, and that’s a big expense
  3. If you need cash on hand to pay off other debt or to do home improvements

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Under what conditions might you want to refinance your mortgage?

  • If your monthly savings from refinancing equals the amount of your closing costs within 1-2 years of closing
  • If your new interest rate is at least a ¼% point lower than your current interest rate
  • If you have a credit rating of 740 or above
  • If you can provide verification of employment and income and other documents necessary for loan underwriting

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How do you go about refinancing your mortgage?

Remember that your goal is to get the best terms and the best rate. Go to your current lender and ask if they will refinance. If they will, see those terms and check them against everybody else out there. Wherever you find the best deal, go with that lender.image-3

Let’s look at an example of what refinancing your loan can do for you in terms of savings:image-4After 3 years of owning your home, you decide you want to refinance and you find a 3.5% interest rate deal from a lender.image-5The difference between the monthly payments is $216 a month. That’s huge!

Where’s the hidden benefit here?

Let’s say you have a pesky $10,000 balance on a credit card.image-6You decide to put the $216 you’ve saved from refinancing towards this credit card payment.image-7If you apply that $438 every month, your credit card debt is paid off in a little over two years. That means you’ve got $222 extra for three years (since you paid your credit card debt off in 2 years) to pay off other debt, or to save some money!

What’s the bottom line here?

Over the lifetime of this refinanced loan, you save $40,000 in interest expenses, $2800 in the first year, plus this extra $222 over almost three years. That’s why it may make sense, if you meet the conditions criteria, to refinance your mortgage.

Until next time, enjoy. Gary

Please note: I reserve the right to delete comments that are offensive or off-topic.

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