Here’s the thing about refinancing: a lot of people find it scary because of all the financial horror stories they’ve heard from the people around them. And honestly, it makes sense: there are people out there who took up a refinancing option because they thought it would help ease their mortgage burdens, but it ended up financially ruining them.
We’re not going to lie: that’s a possibility, but only if you’re being irresponsible. In fact, refinancing can be a great way to save money in the long run and get you out of debt faster than if you didn’t. It’s a wise financial decision if you work with a reputable financial institution and you’re getting your refinancing options for the right reasons.
If you meet those two pre-requisites, then here are a couple of reasons why you should consider refinancing:
Refinancing Helps You Get Lower Rates
In general, refinancing options will cost around 2% and up to 5% of the loan’s principal, depending on your original mortgage rates and terms, not to mention which area you live in: refinancing might carry different terms than, say, Ennis or Maypearl.
By paying this small percentage, you can get better mortgage rates than what you currently have, depending on your lender. The best refinancing options can lower your mortgage rates by 2%, although even a 1% drop in mortgage rates should be enough of a reason for a homeowner to consider refinancing.
Here’s why: let’s say you have a 30-year fixed-rate mortgage with a 5.5% interest rate on a $100,000 home. This will put your principal and interest payments at $568. If you were to refinance it down to 4.1%, your payment goes down to $477, saving you $91 per payment.
Shorten Your Mortgage Terms
Another opportunity that refinancing offers is the ability to shorten your mortgage’s terms. Shortening your mortgage terms is exactly what it sounds like: you speak with your lender to renegotiate your mortgage rates and terms in exchange for a small principal which, again, will be a small price to pay for long-term financial security.
Negotiating for shorter mortgage terms is entirely dependent on your financial situation and it does require a lot of number crunching. On paper, shortening a mortgage term looks more expensive: given the example above, let’s say you shorten your 30-year fixed-rate mortgage at 5.5% interest to a 15-year fixed-rate mortgage at 3.5%. The new terms mean that you’ll be paying $715, a sizable increase per month. However, in the long run, you’ll be paying around $75,000 less than your original terms. Yes, it costs more now, but you’ll be paying it for a lesser amount of time.
Be Warned, Though…
Again, refinancing is not for everyone. You need to assess your finances over the span of decades and determine whether you’ll be able to afford the principal and the renegotiated terms and rates. Work closely with a reputable lender and do as much research as you possibly can so you can avoid paying for more than you should be. Again, refinancing is a wise decision only if you yourself are wise about it.