What if you could have extra cash in your pocket every month—not from a raise or a side hustle, but by making your current debt work for you? Whether you’re looking for ways to lower your monthly bills, pay off your mortgage faster, free up cash for home improvements, or redirect funds into wealth-building opportunities, mortgage loan refinancing could be the answer. Here’s what you need to know.
Building Wealth Through Mortgage Loan Refinancing
When you refinance your mortgage, you essentially replace your existing mortgage with a new one. If the conditions are right, refinancing your home loan can offer significant financial benefits.
One popular strategy is to direct the extra cash toward low-risk investments or other wealth-building assets, such as index funds or high-yield savings accounts. For example, if refinancing saves you $200 per month, you could invest it in a diversified index fund. If the fund averages an annual return of 6-7 percent over 20 years, that monthly $200 could grow into a significant nest egg.
If your goal is to build a financial safety net, using the savings to add a buffer to your emergency fund or maximize your contributions to your retirement accounts will help ensure you have money when you need it most.
Another option is refinancing into a shorter-term loan (i.e., from a 30-year fixed to a 15-year fixed). This approach can help you build equity in your home faster, so you can potentially pay it off sooner or have more cash in hand when you’re ready to sell.
What to Consider Before Refinancing
Lower interest rates and less debt burden sound ideal, but refinancing isn’t always the best financial decision. Here are a few factors to consider that will help you decide whether refinancing makes sense for you.
Current Interest Rates
The market rate plays a significant role in determining if refinancing is worth it. If you bought your home when interest rates were high, it might make sense to refinance when rates drop 1-2 percent lower than your current rate. We recommend working with a mortgage professional to determine your personal break-even point.
Credit Score
Your credit health also factors into whether refinancing makes sense for you. Better credit scores generally lead to more favorable rates, so refinancing may be a great option if you have significantly improved your scores since you bought your home.
Financial Goals
The decision to refinance should be based on your long-term financial objectives. Decide what you want to achieve, such as reducing your monthly outlay, paying off the loan sooner, or freeing up cash to remodel your kitchen. Knowing your end goal will help you make an informed decision about refinancing.
Employment Changes
If you are on your third job in as many years, refinancing may not give you the financial benefits you’re looking for. During the loan application process, lenders will review your employment history and income stability, which could affect the interest rate you’re offered or even whether the loan is approved.
Know Your Refinancing Options
Mortgage loan refinancing isn’t a one-size-fits-all solution. There are different types of refinancing programs available, each of which meets a different market need.
- Rate-and-term refinancing: This is the most common type of refinancing. It’s primarily used to secure a better rate or shorter term without changing the loan balance.
- Cash-out refinancing: This type of mortgage loan refinancing gives homeowners access to a portion of their home equity as cash, which can be used for investments, renovations, or other expenses.
- Streamlined refinancing: Streamlined refinancing is typically only available to FHA, VA, or USDA loan holders. This type of refinancing reduces paperwork and streamlines steps to speed up the process.
Understanding the Refinancing Process and Costs
The steps to refinancing your home are very similar to those you took when applying for your original loan:
The primary differences are the purpose of the loan and the potential for different fees or terms based on your personal goals.
There are typically fewer fees and closing costs during refinancing, but unlike the first time you closed on your house, you are responsible for paying all the costs because you are both buyer and seller. These fees typically add up to 2-5 percent of the loan amount.
It’s important to factor in these additional costs when deciding to refinance your loan because they may negate the potential savings. Use our refinance calculator to determine whether the long-term savings of refinancing add up for you.
Let’s Make Your Refinancing Goals a Reality
Mortgage loan refinancing isn’t just a way to reduce your monthly payments or lower your interest rate; it’s a strategic tool that can reshape your financial future.
Whether you want to reduce your monthly mortgage payment, take advantage of lower interest rates, install your dream kitchen, or save more for retirement, when you’re ready to explore your mortgage loan refinancing options, FFB Mortgage Lenders is here to help!
The content on this site is intended for informational purposes only and should not be considered accounting, legal, tax, or financial advice. First Federal Bank recommends that customers conduct their own research and consult with professional legal and financial advisors before making any financial decisions. Links to third-party websites may be provided for your convenience; however, First Federal Bank does not guarantee the reliability, accuracy, or safety of the information, products, or services offered on these external sites. We are not liable for any damages resulting from the use of these links, and we do not investigate, verify, or endorse the content or opinions expressed on any third-party sites.
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