Save Money Now by Refinancing Your Mortgage

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Author: Karen Zabel

Your home is likely the most expensive purchase you’ll ever make during your lifetime. Most individuals do not have extra cash on hand to pay for a home out of pocket. Thankfully, the mortgage industry is there to help potential homeowners afford the home of their dreams. Representing such a major life expenditure, most mortgages are paid off over a significant period of time â€" usually over a period of 30 years. Any reduction in the interest rate or length of the loan can therefore have a real impact on a homeowner’s bottom line. That’s why it’s a good idea to keep an eye on mortgage interest rates and other terms, to determine when it makes good financial sense to refinance and cash in on potential savings.

One of the primary factors in determining the cost of your mortgage is the interest rate you’re paying. Right now, mortgage rates are near all-time lows. If you took out a first or second mortgage (also called a home equity loan) within the last several years or longer, chances are, refinancing could save you significant cash.

Historically, lenders advised refinancing only when there was a two-point gap between the rate a homeowner was currently paying and the current interest rates, meaning that if you could qualify for a rate that was 1.5 percent lower than your current rate, for example, it wouldn’t make sense to refinance in the long run, once closing costs and other fees were taken into account. But with today’s extremely low rates and other discounting programs in place, lenders agree that rule no longer applies.

Lowering your monthly interest rate can free up significant amounts of cash every month over the life of your loan. When you’re talking about a loan that lasts 30 years â€" and sometimes more â€" or even a shorter loan of 15 years, small differences turn into large cash amounts. By lowering your mortgage payment, you also have extra money to pay off other loans with higher interest rates, or start an emergency savings fund to ward off the budgetary panic that can occur in the face of unexpected expenses.

Interest rates are not the only determining factor that has an impact on your decision of whether or not to refinance your mortgage. You can also save money by shortening the life of your loan. With a lower interest rate reducing your monthly payments, or if you’ve had an increase in your family income enabling you to make higher payments, shortening the life of your loan can be an excellent option that can result in huge savings. Paying off your loan early can also result in your home’s equity going up more quickly. By lessening the amount that’s owed on your home, the difference between the amount owed and the amount your home is worth â€" called the equity â€" increases more rapidly. As a result, you have more cash to tap into when you need to pay for major expenditures, like college or other life events or special occasions.

Refinancing for a higher portion of the value of your home is also a great way to use your home’s equity to pay for the things you need now. In addition to life events mentioned earlier, by refinancing your home and taking advantage of today’s lower interest rates, you can also pay off debts with higher interest rates, resulting in both savings and that all-important peace of mind that comes with knowing your finances are in order.

Most credit card debt and personal loans and lines of credit are unsecured loans â€" that is, they aren’t tied to anything of major value, like a home or other collateral. But a mortgage is tied to your home’s value, meaning the lender feels safer in loaning you more money, and at lower rates than you would find with other types of loan vehicles. For this reason, refinancing your existing mortgage to free up cash and pay off other debts makes excellent financial sense.

In addition to saving you money, refinancing can actually help you earn money when you invest extra money in home improvements that add to the overall value of your home. In this case, taking money out of your home to make it a better place to live can actually increase your home’s value, meaning an instant increase in your equity. And, bringing your home up to date can also help you sell your home faster, and get a higher price down the road.

Online calculators can help you determine whether or not it’s advantageous to refinance your mortgage. But in most cases, considering you’ll be paying for your mortgage for a number of years, even small, incremental differences in interest rates will likely make it worth your while to explore your refinancing options. Speaking directly to a lender is the best way to determine your potential savings.

Karen Zabel is a freelance writer who writes about real estate, mortgages and refinancing.