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Reasons to Refinance
The first step in deciding whether you should refinance is to establish your goals. The most common reasons for refinancing a mortgage are to get a lower mortgage repayment, draw cash out or reduce your mortgage term.
Get a Lower Mortgage Repayment
A lower mortgage repayment means more room in your budget for other things. There are a few ways you can lower your payment by refinancing.
First, you may be able to refinance with a lower mortgage interest rate. If rates now are lower than they were when you bought your home, it’s worth talking to your mortgage adviser to see what your interest rate could be. Getting a lower interest rate means lowering the interest portion of your monthly payment – and big interest savings over the remaining mortgage term.
Second, you could refinance to get rid of mortgage your insurance (low equity premium) – a monthly fee you pay to protect your lender in the event that you default on the loan. Mortgage insurance is usually only required when you pay less than a 20% deposit. You could save hundreds of dollars a month by refinancing to stop paying monthly mortgage insurance.
Third, you can get a lower payment by changing your mortgage term. Lengthening your term stretches out your payments over more years, which makes each payment smaller.
There may be other ways you can get a lower payment, so it’s always worth checking with your mortgage adviser to see how they can help you get a payment that fits your current budget.
Take Cash Out
Refinancing your mortgage is a great way to use the equity you have in your home. With a cash-out refinance, you refinance for a higher loan amount than what you owe and pocket the difference. Any proceeds you receive are tax-free.
Many homeowners use cash from their home to pay off high-interest credit card debt and personal loans. You can also take cash out to finance home improvements, education or whatever you need. Since mortgage interest rates are typically lower than interest rates on other debts, a cash-out refinance can be a great way to consolidate or pay off debt.
You may be able to take cash from your home if you’ve been paying on the loan long enough to build equity. Additionally, you may be able to do a cash-out refinance if your property value has increased; a higher value on your home means your lender can give you more money to finance it.
Shorten Your Mortgage Term
Shortening your mortgage term is a great way to save money on interest. Often, shortening your term means you’ll receive a better interest rate. A better interest rate and fewer years of payments mean big interest savings in the long run.
So how does this work? Let’s look at an example. Say your loan amount is $300,000. If you got a 30-year loan with a 5% interest rate, you would pay approximately $279,767 in interest over the life of the loan. However, if you cut your term in half, you would pay about $127,029 in interest over the life of the loan. That’s a difference of $152,738 – and it doesn’t even account for the fact that the shorter term may provide you with a lower interest rate (and more savings).
An important thing to know about shortening your term is that it may increase your monthly mortgage payment. However, less of your payment will go toward interest, and more of it will go toward paying down your loan balance. This allows you to build equity and pay off your home faster.
