This is another benefit of being a home-owner, is that you get the opportunity to refinance whenever you mortgage term comes to mind. I’ve written a few posts this year on why owning a home is a better option, as opposed to renting. I bought my first home, two years ago and it’s one of the most financially sound decisions I’ve ever made. Not only did I get the home I purchased for a steal, but with upgrades, major and minor I’ve gained about $20,000 in equity (not including my down-payment) in a short amount of time. Even though my refinancing is not for another 3 years, I wanted to talk about Home Refinancing in a mini two-part series called the Upside & Downside of Home Refinancing. Let’s start with the upside.
Home Refinancing is…
When you have some home equity built up in your home via paying down your mortgage over the years, equity gain on the market and/or putting a large down payment on it. The homeowner can use that equity to pay off OTHER debts so that instead of having a mortgage payment, a credit card payment, a line of credit payment or a vehicle payment, you can neatly combine all the into one payment, alongside your mortgage payment.
The upside
By refinancing your mortgage and all your outstanding debt into one payment, you are virtually freeing up hundreds of dollars monthly, allowing you a greater cash-flow. By having a greater cash-flow, you can start to build up an emergency savings account, put more money towards your retirement and simply save more. Second upside is you will save thousands on interest. You won’t have to pay a separate interest rate on your credit-card, separate interest rate on your line of credit or separate interest rate on your automobile loan.
Secured Refinance
Once you refinance your debt into your mortgage and get a lower interest rate, you are on the upside again. Your newly converted debt (refinanced) is now SECURED by your home equity, as opposed to UNSECURED. Secured essentially means that if you can not pay your debts, the bank will get the value of your debt back by selling your home, taking what you owe them and leaving you with the rest. Hence why it’s called a secured refinance and in turn the bank offers you a lower interest rate, because they have the security of your home in case you default.
Popular Option
Refinancing your debt into your home is one of the most popular options offered by the banks, because its more business for them, less risk and even the customer wins, by freeing up more cash-flow and saving on interest. In this day and age of people spending more than they earn, no wonder its a smart option. This is the upside of Home Refinancing, but there is a downside from a psychological aspect, which I will touch on in Part Two of Home Refinancing. Like most things finance related, this is a double edged sword as well.
We are lucky that we don’t have any debt other than our mortgage so we haven’t had to do this. We did owe money though we found it was less interest to pay it off via a line of credit. Depending on interest rates though this can be a good option.
Yes it can be a good option, in most cases it is a better option that a LOC, because the interest rate is lower. Very rare that the interest rate is lower than your mortgage rate at the time of refinance.