Insights & Stories

Three Ways a Mortgage Refinance Can Change Your Life

Reading time: 3 Minutes

October 5th, 2018

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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 need to tap into your home equity to access cash, here are three ways a refinance can change your life.

Lower Your Monthly Payments

If you’re feeling squeezed in your monthly budget, one of the best places to start looking for savings is in your mortgage. Refinancing your mortgage to a lower interest rate could lower your monthly payment. This works if current interest rates are lower than the rate you’re paying.

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 down debt, fixing up the house or contributing to the kids’ college fund.

Consolidate High-Interest Debt

Another option, if you’ve got equity built up in your home, is to refinance your mortgage and use the extra cash to pay off your credit card balance. With credit cards charging interest rates upward of 20 percent, refinancing in order to pay off this kind of expensive debt can be a smart move. After all, the interest rate will likely be significantly less and the interest paid may be tax deductible.

Here’s how it works: a cash-out refinance lets you get a new mortgage for more than your current mortgage balance. You pay off your existing mortgage with a new, larger mortgage, and then have access to the additional money to use for paying down other debts.

For example, you might still owe $100,000 on your mortgage, but you refinance for $200,000, using the built-up equity in your home as collateral. You can only do this if your loan amount is within the loan to value guidelines of your lender, which means in most cases you will only be to borrow up to a portion of what your home is worth.

A note of caution: Refinancing to pay off credit cards makes sense only if you know you’ve got your spending under control and won’t be tempted to rack up more credit card debt. If you’ve still got the same shopping habits that got you into debt in the first place, taking out money from your home could put you into an even bigger financial hole later. Tread carefully.

Pay Off Your Mortgage Sooner (and Pay Less in Interest)

Refinancing can also 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, 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.

Final Thoughts

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 with a mortgage calculator or speak with a mortgage expert to make sure a refinance makes sense for you and your goals.


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