There are a number of benefits that may be associated with refinancing a home. While refinancing may not be the right decision in some cases, there are a number of benefits that can be gained from refinancing under favorable conditions. Some of these benefits include lower monthly payments, debt consolidation and the ability to leverage existing home equity. Homeowners who are considering refinancing should consider these options in light of their current financial situation to determine if they wish to refinance their home.
Lowering the monthly payment
For many homeowners, the possibility of lowering monthly payments is a very attractive benefit of refinancing. Many homeowners are living paycheck to paycheck, and for these homeowners, finding an opportunity to increase their savings can be a huge accomplishment. Homeowners who are able to negotiate a lower interest rate when refinancing are likely to see the benefit of a lower monthly mortgage payment as a result of the refinancing decision.
Each month, the homeowner submits a mortgage payment. This payment is usually used to pay off a portion of the interest and a portion of the principle of the loan. Homeowners who are able to refinance their loan at a lower interest rate may see a reduction in the amount of interest and principle they pay. This may be due to the lower interest rate as well as the lower remaining balance. When a home is refinanced, a second mortgage is taken out to pay off the first mortgage. If the existing mortgage is several years old, then the homeowner likely already has some equity and has paid off some of the previous balance in principle. This allows the homeowner to obtain a smaller mortgage when refinancing the home because they are paying off less debt than the original purchase price of the home.
Debt Consolidation
Some homeowners begin investigating refinancing for the purpose of consolidating debt. This is especially true for homeowners who have high interest debts, such as credit card debt. Debt consolidation loans allow homeowners to use the existing equity in their home as collateral to obtain a low-interest loan large enough to pay off the existing balance of the home as well as a number of other debts such as credit card debt, car loans, student loans or any other debt the homeowner may have.
When refinancing for the purpose of debt consolidation, there is not always an overall increase in savings. Those seeking debt consolidation often struggle with their monthly payments and seek an option that makes it easier for homeowners to manage their monthly bills.
In addition, debt consolidation can simplify the process of paying monthly bills. Homeowners who are skeptical about participating in a monthly bill payment plan may be overwhelmed by the number of bills they have to pay each month. Even if the value of these bills is not a concern, the act of writing several checks each month and making sure they are sent to the correct location on time can be overwhelming. For this reason, many homeowners often refinance their mortgages to minimize their monthly payments.
Leverage existing home equity
Another popular reason for refinancing is to take advantage of existing equity in the home. Homeowners who have a significant amount of equity in their homes may find that they are able to liquidate that equity for other purposes. This may include making modifications to the home, starting a business, taking a fantastic vacation or pursuing a higher level of education. Homeowners are not limited in how they can use their home equity and can refinance a home equity line of credit that can be used for any purpose imaginable. A home equity line of credit is different from a loan because the funds are not disbursed in a lump sum. Instead, the funds are made available to the homeowner, who can draw on them at any time during the draw period.