What would you do with an extra $50,000? Put into an investment fund? Set up a college fund for your kids? Or set up a nest egg for retirement? One reply you’re unlikely to hear is give it to my banker.
Unfortunately, securing a $200,000 mortgage at a rate of 5% instead of 3.5% will cost you an extra $50,000. Failing to seek a refinance here in Utah after securing a loan with a high-interest rate can mar your homeowning experience. It also leaves you in a precarious financial situation.
Build equity quickly
Negotiating better terms on your loan helps you build equity in the home quickly. See, the interest on mortgage loans are frontloaded, i.e., you pay the bulk of the interest first. A significant percentage of the monthly payments go toward the interest with the remainder going towards paying down the principal amount.
Since only a small portion of the monthly payment goes toward paying off the loan, the principal amount remains relatively unchanged in the first few years. That keeps the interest payable on the loan high, making the house more expensive. A refinance lowers the amount of money owed as interest, making a great way to save money.
If you were to keep your monthly payments the same even after refinancing, you’d build equity in the house faster. Any extra money that you pay over the agreed-upon amount goes towards offsetting the principal amount. Refinancing a mortgage can help you pay it off quicker.
Lower the total cost of the house
Any money that you pay to the bank as interest doesn’t reflect on the value of the home, but it leaves a dent in your finances. Think of the interest as a reward the bank the gets from fronting you the money to purchase your dream home. After the dust settles, that’s money that you just gave away without a trace.
Since borrowers with bad credit get saddled with interest rates as high as 8%, the final cost of the house often ends up being more than twice its value. Such homebuyers must seek to refinance their loans as soon as they can afford to so.
Doing so early enough can save you a considerable amount of money and lower the final cost of the house.
Avoid mortgage stress
If your monthly mortgage payments work to more than 28% of your paycheck, you’re considered to be mortgage stressed. Homeowners in this category are always one step away from disaster. They have a higher risk of defaulting on their payment thanks to the spiraling cost of living.
A recent study found that most Americans can’t handle a $400 emergency as they don’t have that much cash lying around. In case of an emergency, such homeowners would have to resort to borrowing or putting such an item on their credit cards.
Since they’re cash-strapped, they can’t even afford to pay the credit cards on time, and this drives them further into debt.
Refinancing a mortgage helps to free up some of your money to let you put it to better use. It can make the difference between living hand to mouth and going on to build a happy and successful life.