Three Ways a Mortgage Refinance Can Change Your Life
Reading time: 3 Minutes
By Amanda Abella
One of the most effective ways to free up money in your budget is to reduce how much you're paying for housing. That's why refinancing your mortgage can be a smart money move, under the right circumstances. Whether your monthly budget is tight or you want cash flow for a specific project, here are three ways a refinance can change your life.
Pay Off Your Mortgage Sooner (and Pay Less in Interest)
Refinancing can help you pay your mortgage off before you retire, and could even help you retire sooner.
Michael Manago, senior loan officer at Bank of Hawaii, recently helped one of his customers save money on interest, making it easier to retire early. During a consultation, Manago noticed that mortgage interest rates were a couple of percentage points lower than the one on a customer's original mortgage. The customer was comfortable with their monthly payment and had 20 years remaining on their original loan.
By refinancing at the same term (20 years) and a lower rate, the customer was able to save $500 a month. Manago recommended the customer continue with their original monthly payment amount, which effectively contributed that $500 to their loan principal each month and allowed the client to pay off their mortgage sooner and pay less in interest.
Lower Your Monthly Mortgage Payments
If you're feeling squeezed in your monthly budget, reducing your mortgage bill is the single biggest way to free up money. Refinancing your mortgage to a lower interest rate could lower your monthly payment. This works if current interest rates are lower than what you're paying in interest.
For example, let's take the median home value in Honolulu of $789,500. Let's assume you have $500,000 left at a 6 percent interest rate on a 30-year mortgage. If you plug the numbers into a mortgage calculator, you'll see the monthly payment is $2,998. If you're able to refinance to a 5 percent interest rate, your monthly payment decreases to $2,684. That's a savings of more than $300 a month!
Once you free up the money, you'll be able to use it toward other goals, such as emergency savings, paying off other debts or contributing to the kids' college fund.
Access Cash to Pay for College
If you're sending children off to college, you may need to access a large amount of cash. With a cash-out refinance option, you can receive cash for some portion of the equity on
your home. Your loan amount and monthly payments will increase, but, with this option, your young adult may not need to worry about taking out as many student loans. In some cases, by combining that extra money with grants and scholarships, they may be able to avoid loans altogether.
Or, maybe you would like to go back to school to further your education. A cash-out refinance can give you access to the cash you need to make that happen.
From freeing up money to helping you retire sooner, refinancing a mortgage can help you meet other financial goals more easily. Just crunch the numbers to make sure a refinance makes sense for you and your goals.
Amanda Abella is a writer and Amazon bestselling author of Make Money Your Honey. She specializes in millennials, personal finance, credit cards, debt, student loans, budgets, investing and business.