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Benefits of Re-Financing
There are a number of benefits which may be associated with
re-financing a home. While there are some situations where re-financing is not
the right decision, there are a host of benefits which can be gained from
re-financing under favorable conditions. Some of these benefits include lower
monthly payments, debt consolidation and the ability to utilize the existing
equity in the home. Homeowners who are considering re-financing should consider
each of these options with their current financial situation to determine
whether or not they wish to re-finance their home.
Lower Monthly Payments
For many homeowners the possibility of lower monthly payments is a very
appealing benefit of re-financing. Many homeowners live paycheck to paycheck and
for these homeowners finding an opportunity to increase their savings can be a
monumental feat. Homeowners who are able to negotiate lower interest rates when
they re-finance their home will likely see the benefit of lower monthly mortgage
payments resulting from the decision to re-finance.
Each month homeowners submit a mortgage payment. This payment is typically used
to repay a portion of the interest as well as a portion of the principle on the
loan. Homeowners who are able to refinance their loan at a lower interest rate
may see a decrease in the amount they are paying in both interest and principle.
This may be due to the lower interest rate as well as the lower remaining
balance. When a home is re-financed, a second mortgage is taken out to repay the
first mortgage. If the existing mortgage was already a few years old, it is
likely the homeowner already had some equity and had paid off some of the
previous principle balance. This enables the homeowner to take out a smaller
mortgage when they re-finance their home because they are repaying a smaller
debt than the original purchase price of the home.
Debt Consolidation
Some homeowners begin to investigate re-financing for the purpose of debt
consolidation. This is especially true for homeowners who have high interest
debts such as credit card debts. A debt consolidation loan enables the homeowner
to use the existing equity in their home as collateral to secure a low interest
loan which is large enough to repay the existing balance on the home as well as
a number of other debts such as credit card debt, car loans, student loans or
any other debts the homeowner may have.
When re-financing is done of the purpose of debt consolidation there is not
always an overall increase in savings. Those who are seeking to consolidate
their debts are often struggling with their monthly payments and are seeking an
option which makes it easier for the homeowner to manage their monthly bills.
Additionally, debt consolidation can also simplify the process of paying monthly
bills. Homeowners who are apprehensive about participating in monthly bill pay
programs may be overwhelmed by the amount of bills they have to pay each month.
Even if the value of these bills is not worrisome just the act of writing
several checks each month and ensuring they are sent, on time, to the correct
location can be overwhelming. For this reason, many homeowners often re-finance
their mortgage to minimize the amount of payments they are making each month.
Using the Existing Equity in the Home
Another popular reason for re-financing is to use the existing equity in the
home. Homeowners who have a considerable amount of equity in their home may find
they are able to cash out some of this equity for other purposes. This may
include making improvements to the home, starting a business, taking a dream
vacation or pursuing a higher degree of education. The homeowner is not limited
in how they can use the equity in their home and may re-finance a home equity
line of credit which can be used for any purpose imaginable. A home equity line
of credit is different from a loan because the funds are not disbursed all at
once. Rather the funds are made available to the homeowner and the homeowner can
withdraw these finds at anytime during the draw period. |
