What are the main benefits of refinancing your home?
To buy a home you would usually consult with a real estate agent to decide on the location, the budget and the home size. After finding your ideal home, you would then speak to your bank or a mortgage broker about opening a mortgage to borrow money for your new home. Your mortgage will probably be the most significant expense you will ever have to manage. It will have a direct influence on other elements of your finances, such as how much spare income you can put into a savings account, and how much extra debt you can comfortably take on. Refinancing your home can provide a number of benefits. If done at the right time and for the right reasons.
Get a lower interest rate and monthly payment
The major reason homeowners refinance their homes is to save money on interest by locking in a lower rate. The amount you may save may appear insignificant at first, but it adds up over time. A 5-year fixed-rate mortgage is the most common form of mortgage in Canada. The borrower pays regular mortgage payments for five years at the rate provided by the lender at the commencement of the mortgage under this arrangement. The rate remains constant during the term.
Assume you’re now bound into such a mortgage arrangement and interest rates unexpectedly fall two years into it. This isn’t an ideal situation, current mortgages offer considerably lower rates, yet you are stuck paying a more expensive rate for another three years! In this case, it makes sense to refinance your mortgage to take advantage of the reduced rates.
Pay off your Mortgage earlier
Some borrowers begin with a 30-year fixed-rate mortgage and then refinance to a 15-year fixed-rate mortgage after a few years. This enables them to pay off the mortgage sooner and save a significant amount of money in interest over the life of the loan. Mortgage rates on 15-year loans are also much lower than rates on 30-year loans, so you may be able to reduce your term without dramatically increasing your monthly mortgage payment.
Access the equity in your home
By refinancing your mortgage, you can gain access to your home’s equity and use it for a variety of activities or expenditures. You may use the money to buy a new car, take a long trip, or pay for your child’s college tuition. It can also be very beneficial for a homeowner to use that equity for renovation projects such as updating your kitchen, bathrooms, or the basement. Improvements in these areas will have the most effect on increasing your appraised value and the market value of your home.
Consolidate your debt at a lower rate
Debt consolidation is the process of consolidating all of your previous debts into a single mortgage, which includes credit cards, lines of credit, vehicle loans, and personal loans. Lenders are more likely to offer you a cheaper rate if your home backs the mortgage, as it is a physical asset with the potential to appreciate. By combining your mortgage with these high-cost loan options, you may dramatically minimize your interest payment. Paying your debt will be easier to handle with one monthly or bi-weekly payment to make. You may also improve your credit score by making regular payments for a prolonged period of time.
Refinancing your home offers a lot of benefits. These benefits assist in saving money by paying lower interest, paying off your mortgage earlier, and consolidating your debt at a lower rate. Another benefit of refinancing your home is by accessing that home’s equity and using it for other assets. Keep in mind that refinancing your home involves breaking your mortgage early which will also incur some costs. So, it is key to ensure that the benefits outweigh any costs.
