Once you have gotten yourself into a home mortgage, it can be easy to get comfortable with your monthly payments over the years. But if you haven’t considered refinancing yet, you could be missing out on thousands in savings.
Current mortgage interest rates are hovering around 3%, with unconventional loans being even lower. If you’ve been locked into a higher interest rate, taking advantage of these record low rates will save you money which you can then reinvest in a higher interest avenue.
So how can refinancing save you money for future investment?
1. Lower your interest rate.
For many, mortgage refinancing provides them with the opportunity to get a better deal, lower their interest rate, and therefore less interest in the same principal loan amount. Lower interest rates will lower monthly payment and long-term costs.
2. Change your payoff term.
Depending on your financial goals, you can either lengthen or shorten your payoff term. A longer payoff term means that your monthly payments will be smaller, however you will pay more in interest over the life of the loan. A shorter payoff period, such as 15 years, means you will pay less in interest over the life of the loan, but your monthly payments will be higher. Both options can ultimately save borrowers money which they can then reinvest.
3. Lower your monthly mortgage payment.
If you keep the same term, but lower your interest rate through a refinance, you will be able to set aside more money each month. The difference between a 4.5% interest rate and 3% interest rate on a $400,000 loan principal is $6,000 in interest payments each year. If your current interest rate is even higher, you have the potential to access even more savings.
4. Stop paying for mortgage insurance.
When borrowers don’t have at least a 20% deposit on a home purchase, they are required to pay for mortgage insurance. Mortgage insurance protects the bank if the borrower defaults, but also adds an additional cost of approximately $2,200. If the value of a property has increased since it was purchased and the owners now have more than 20% of equity, they can refinance to remove the need for mortgage insurance, thus saving even more money each year.
5. Access your equity with a cash-out refinance
Property values tend to appreciate over time. This equity can be unlocked through refinancing. Owners can use their built-up equity to pay off other debts or to invest. If you’re looking to pay off debts, first target your debts with the highest interest such as credit cards or student loans.
Many think that it’s counterintuitive to increase the loan principal on your primary residence, however, the interest on your home mortgage is tax-deductible. By freeing this equity, you can use those funds to reinvest in a higher interest-earning asset while getting a tax deduction on the interest you are paying.
Regardless of your financial circumstances, borrowers should consider the option of refinancing. It can limit your monthly costs and let you access equity. Reducing your monthly mortgage payments means that you can potentially save thousands of dollars each month for you to reinvest.