Refinancing your home could buy you a new car, a boat, or a vacation home. It could even pay off your debts. Many people refinance to take advantage of the low rates to pay off their high APR credit cards and unsecured loans. Let us look at getting some extra cash to help shore up your finances.
Two ways for refinancing your home
The first way for refinancing your home is with what’s called a homeowner’s equity line of credit or HELOC.
You may not have thought of it but your probably have a nice amount of equity in your home. In case you’re wondering what equity is, it’s the difference between what your home is worth and the amount you owe on it. If you’ve been in your house for 10 years or longer, you probably have a fair amount of equity in it. As an example of this, if your home’s now worth $200,000 and you owe just $150,000 on your mortgage, congratulations! You have $50,000 in equity and you might think about refinancing your home to take advantage of it.
Get a lower interest rate
The second way for refinancing your home is to get a whole new mortgage. Even if you don’t have much equity in your home, now might be a great time to do this. However, this will depend on the interest rate you’re now paying.
Let’s suppose your mortgage has an interest rate of 7%. If you owe $150,000 on your home, your monthly payment is probably around $997.95 (not including taxes and insurance). If you refinance your home with a new mortgage that has an interest rate of 3.72% (which was the average when I wrote this post) your payment would drop to $692.32 – a savings of more than $300 a month. How good would that feel?
That’s an extra $300 a month you can use to pay off your high interest rate credit card debt, pay off student loans, pay back your IRS debts, or pay off your medical bills. An extra $300 a month could be a lifeline you need to get your financial life back on track.
How refinancing works
Refinancing your home can be fairly simple. A good place to start is the bank or mortgage company that has your current mortgage. You can ask if they have any special offers to their current customers. If you don’t want to do this for some reason, you could go to almost any other lender. Make sure you also check with your local credit unions as they may have some of the lowest rates and fees for refinancing.
There is some paper work associated with a refi (refinance) and you may have to pay closing costs. Don’t just take the first offer you get but shop round instead. It’s a competitive world out there and if you do some comparison-shopping, you might be able to find a refi loan with a much better interest rate and no application fee or closing costs. Or you can choose to roll in the closing costs fees into the new loan so you have to bring less money to the closing table.
You can check out the free refinance calculators online and make sure it makes sense to refinance in the first place. You want to make sure you get a relatively quick return on your investment as you will have to come up with $3000 to $5000 on average for the closing costs. It will take you 3 to 4 years to fully recoup your refinance costs but then you can be saving money for 20 years or more depending on your new mortgage term.
Today’s interest rates
When I wrote this post, the interest rate on a 30-year refinancing loan was 3.72% and 3.10% on a 15-year refi. These are both incredibly good interest rates so that refinancing your home today could be one of the best deals you’ll see for a long, long time. You can check rates at bankrate.com and see what your new monthly payment could be.