There are a number of benefits which may be associated with re-financing a home. While there are some examples where re-financing is not the correct decision, there are a load of benefits which can be gained from re-financing under favorable conditions. Some of these advantages include lower monthly payments, debt consolidation, and the ability to employ the existing equity in the home. Homeowners who are considering re-financing should think about each of these options measured up with their current financial situation to determine whether or not they would be wise 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 give in a mortgage payment. This payment is typically used to repay a percentage of the interest and of the principle on the loan. Homeowners who are allowed to refinance their loan at a decreased interest rate may see a decrease in the amount they are paying in both interest and principle. This may be caused by the lower interest rate as well as the lower outstanding balance. When a home is re-financed, a second mortgage is taken out to pay off the first mortgage. If the first mortgage was already a few years old, it is likely the homeowner already had some equity and had paid off some of the former principle balance. This allows 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.
Some homeowners begin to contemplate re-financing for the purpose of debt consolidation. This is particularly true for homeowners who have high interest debts such as credit card debts. A debt consolidation loan allows the homeowner to use the existing equity in their home as collateral to secure a low interest loan which is big enough to repay the outstanding balance on the home as well as numerous other debts such as credit card debt, car loans, student loans, or any other debts the homeowner may have.
When re-financing is done for the purpose of debt consolidation there is not always an overall increase in savings. Those who are seeking to consolidate their debts are often having trouble 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.
ABOUT THE AUTHOR
Bob Schwartz, is a Certified Residential Specialist, and a CA licensed San Diego real estate broker with. Bob has over 27 years of residential real estate experience, authored a number of published articles and served as an expert witness for San Diego lawyers. You can contact Bob via his highly popular San Diego real estate website.
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