There are many ways to build wealth and stability in your financial future, and real estate is an effective option. If you own the property that you live in or are in process of buying the property, you may have equity in your home that you can put to better use for your family. A refinance of that equity, which can pay out in many different ways, can make it much easier to stay financially secure in the space you currently own. Your mortgage is what is known as a secured debt, or a debt that has collateral. If you have unsecured debt, such as credit card debt, you may be able to use the equity in your home to lower both your payments and the interest level that you're paying on unsecured debt. You may also be able to shorten the term of your mortgage and own your house sooner, or you can lower your house payments if money is tight. Really, there’s many benefits to and reasons to refinance a mortgage.
1 - Get Cash to Conquer Other Debt
The value of your home may have gone up, which is the simplest way to build equity. If you haven't looked at a refinance in a couple of years, it may be time to consider it again. Once you know the cash payout benefit available, it's time to take a look at your other debts. Create a simple spreadsheet that allows you to track your other debts by the total amount owed. the interest rate of each debt and the payment amount due each month. Be sure to add headers so you can sort your grid by each of these characteristics.
2 - Improve Your Credit Rating
Once your grid is working, you can determine the best payoff choice for your household. If you rank debts from smallest to largest, paying things off in this order can help you free up credit. The snowball method is very good for folks looking to improve their credit rating; paying off these accounts and leaving them open will increase your available credit. The avalanche method is also beneficial. Rank your debts by interest rate from largest to smallest and wipe out the debts in this order. You can also reduce interest by consolidating and transferring debts, but there will be fees for each transfer. Finally, consider ranking your debts by the monthly payment. If you can afford to pay off a couple of large monthly debts, you can free up quite a bit of money each month. For those planning for retirement or trying to go part-time, this step can be quite helpful.
3 - Lower Your Payments/Shorten the Term
Consider also simply refinancing for other purposes. For example, you can refinance from a 30 to a 15 year mortgage and shorten the number of payments you have to make overall. You can also refinance to wipe out the percentage of private mortgage insurance or PMI you have to pay. PMI is not terribly costly, but it does add up over time. Once you get your mortgage under 80% of the value of your home, you won't have to pay PMI. Be aware that this fee only applies to conventional mortgages. An FHA mortgage will have a different form of loan insurance.
4 - Flexibility Over the Loan Payment Long Term
If you currently have an adjustable rate mortgage, it's a good idea to refinance whenever rates are very low. Knowing what your rate is each month makes it easier to manage your budget over time. There are many banks offering great rates right now. If you have a decent credit rating, talk to your current bank and see what they offer. You may be able to easily pay your mortgage each month through a direct deposit with a locally held mortgage.