5 benefits of a mortgage refinance — aside from lowering monthly payments

As the number of coronavirus cases rises this summer, interest rates remain low. For those with steady employment who bought their home pre-pandemic, now may be the perfect time to take advantage of low rates by refinancing a home mortgage.

What are the benefits of refinancing a mortgage?

1. Expedited payoff

A homeowner refinances a $400,000 30-year mortgage at 4.5 percent to one at 3.35 percent and shaves $345 off the monthly payment. Instead of putting the savings into a savings account, the homeowner continues to pay the old mortgage payment. By using the refinance savings to pay off the home, the homeowner, in this example, reduces the term of the mortgage by seven years and five months with money in their budget they already have.

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2. Build up equity faster

Refinancing from a 30-year loan to a 15-year mortgage will substantially increase the monthly payment, which puts many homeowners off. While paying more each month isn’t fun, refinancing to a shorter loan drastically reduces the amount paid in interest over the life of the loan. For a homeowner refinancing a $400,000 mortgage from 30 years down to 15 years, the savings in interest (less closing costs) would be an eye-popping $100,000.

Refinancing to a shorter loan means you’ll build up more equity in the home at a faster rate, which is a good idea if you plan to use the home equity in future for large purchases or to eventually get into a bigger home.

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3. More predictable costs

If you took on an adjustable-rate mortgage (ARM) when you first purchased your home, you likely did so because the low-interest rate at the beginning of the loan term was very enticing. The good news is, with rates being as low as they are now, homeowners can lock in a low rate for the entire life of their loan without worrying about interest rate increases as the markets continue to shift because of the pandemic.

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4. Debt consolidation

A cash-out refinance is a lesser-known type of mortgage refinance product that can help homeowners leverage existing home equity in the short term, while taking advantage of the current low-interest rates.

For example, a homeowner owes $350,000 on a 30-year mortgage for a home worth $400,000. A homeowner can refinance to a 30-year mortgage for $400,000 and receive $50,000 in cash after paying off the first loan. The 30-year term starts over and the payment may be higher, but they can now use the cash however they see fit. Many homeowners use this tactic to “borrow” against the equity in their home at a rock-bottom interest rate, and then use the cash to pay off higher interest debt on credit cards.

With most credit card interest rates being over 17 percent, consolidating debt at 3 to 4 percent is the smarter money move.

5. Dropping private mortgage insurance (PMI)

Most conventional mortgages allow homeowners to drop the PMI once they’ve reached 20 percent equity in the home, but this isn’t allowed on FHA loans. For homeowners with FHA loans, refinancing would be the only way to get rid of the monthly PMI payment.

Homeowners in areas where values are rising quickly should take advantage of refinancing to increase the amount of equity in their home. If a homeowner holds 10 percent equity on a $350,000 mortgage, but their home is now worth $400,000, they’re actually sitting on 22 percent equity, just based on current market value of home.

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Is now a good time to refinance?

Since interest rates fluctuate with the market, it’s best to lock in low-interest rates now before they go up again. This is why so many are refinancing now instead of waiting to see what shakes out with pandemic in the fall and into 2021.

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Living in unprecedented times means everyone should explore every avenue possible when it comes to putting more money back in their pocket. With what lies ahead being so unknown, every dollar counts.