Existing homeowners are primed to take advantage of these historically- low mortgage rates. Refinancing to a lower rate allows borrowers to lower their monthly mortgage payment. The monthly savings can then be used to get ahead on financial goals, such as home improvements, eliminating high-interest debt, boosting retirement savings, furthering education, estate planning, or paying off a mortgage faster.
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The Benefits to Refinancing
To illustrate the benefits of refinancing, let’s say you bought a home for $400,000 with 10% down and took out a 30-year mortgage at 4.25% for the $360,000 you needed to borrow. If you’ve been paying the loan for three years, you’d have a loan balance of roughly $340,500, according to the NextAdvisor mortgage calculator. By taking out a new 30-year refinance loan at 3%, you would lower your monthly payment by $335 and save close to $55,600 in interest.
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But before you refinance, you’ll want to calculate your break-even point. Depending on your monthly savings, closing costs, and how long you plan on staying in the home, the break-even point will tell you if it makes sense for you to refinance. Generally speaking, you’ll want to stay in your house until you’ve at least reached the break-even point.
The break-even point is calculated by taking your closing costs and dividing it by your monthly savings. For example, if the closing costs are $5,000 and your monthly savings is $500, your break-even point would be 10 months. In this case, it would make sense to refinance as long as you plan on keeping the loan for at least the next 10 months.
6 Ways You Can Apply Savings From a Refinance
While getting monthly savings from a refinance is great, you can reap even more benefits if you use the savings wisely. Here are just a few ways you could use the savings for an even greater impact.
1. Build emergency savings
Having emergency funds can turn a potential disaster into an inconvenience. Emergency examples include an unexpected job loss, car repairs, medical emergencies, or home repairs.
Many experts recommend having at least three to six months of living expenses in an emergency fund. Having this amount avoids the stress of scrambling for funds or borrowing money. By freeing up cash flow from a mortgage refinance, take the amount you saved and add those funds to a high-yield savings account each month.
2. Pay off high-interest debt
By refinancing to a lower monthly payment, you could apply your new monthly savings to your other debt. Target the debts with the highest interest rate. The earlier you pay off debt, the less interest paid over the long run. Plus, once debts are paid off, more monthly cash flow is opened up.
3. Increase retirement contributions
The longer retirement funds are in the market, the more they will compound and grow. So the sooner and more you contribute, the better. By lowering your monthly payment with a refinance, you can use your new monthly savings and put it towards funding a retirement account such as a brokerage, IRA, or 401(k).
4. Invest in education
Getting additional training, education, and professional licenses could make you a strong candidate for getting that next big promotion or raise. These things aren’t free, but by refinancing, you’ll be able to take the monthly savings to invest in furthering your education and improve your odds of landing a better job with a higher salary.
5. Home improvements
The monthly savings from refinancing can be invested back into your home. Strategic renovations and upgrades can increase the value of a home. With homes in such demand right now, home improvements can make your home more marketable and help it sell faster and at a higher price.
6. Pay off a mortgage faster
You can refinance into a shorter-term mortgage and pay it off faster. Or you can use the monthly savings to make extra mortgage payments which also speeds up a payoff timeline. Paying off a mortgage sooner will save you in total interest paid over the loan’s life.