5 Benefits of Refinancing Your Home Loan – Nationwide (2024)

FAQs

What are the benefits of refinancing your home? ›

Pros of mortgage refinance

You could lower your interest rate. You could lower your mortgage payment and create more space in your monthly budget. You could decrease your loan's term and pay it off sooner. You could tap into your home's equity and take cash out at closing.

When people refinance, they change the terms of their loan with their bank or lender so they are paying a lower monthly interest rate. While that means less in loan payments for lenders, homeowners must pay application and closing fees to get this deal, which is immediate revenue for those lenders.

Common goals from refinancing are to lower one's fixed interest rate to reduce payments over the life of the loan, to change the duration of the loan, or to switch from a fixed-rate mortgage to an adjustable-rate mortgage (ARM) or vice versa.

The main benefits of refinancing your home are saving money on interest and having the opportunity to change loan terms. Drawbacks include the closing costs you'll pay and the potential for limited savings if you take out a larger loan or choose a longer term.

Refinancing your mortgage may be able to give you some breathing room by lowering your monthly payments and/or saving you money over time. At the same time, refinancing can be a little complicated, especially if your credit score is less than ideal or you're not completely sure what to expect.

With a cash-out refinance, you get a new home loan for more than you currently owe on your house. The difference between that new mortgage amount and the balance on your previous mortgage goes to you at closing in cash, which you can spend on home improvements, debt consolidation or other financial needs.

An often-quoted rule of thumb says that if mortgage rates are lower than your current rate by 1% or more, it might be a good idea to refinance.

Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender. Some servicers will offer lower interest rates to entice their existing customers to refinance with them, just as you might expect.

A cash-out refinance is a type of mortgage refinance that takes advantage of the equity you've built over time and gives you cash in exchange for taking on a larger mortgage. In other words, with a cash-out refinance, you borrow more than you owe on your mortgage and pocket the difference.

Better interest rate: If rates have dropped or you have improved your credit score, you could be able to save money on interest. Faster loan payoff: If you're comfortable making higher monthly payments and you want to get out of debt faster, you can refinance a personal loan to a shorter term.

What is a point when refinancing? ›

Points let you make a tradeoff between your upfront costs and your monthly payment. By paying points, you pay more up front, but you receive a lower interest rate and therefore pay less over time. Points can be a good choice if you plan to keep your loan for a long time. One point equals one percent of the loan amount.

To Lower Your Mortgage Interest Rate

So, refinancing to a lower interest rate can help decrease your monthly payment and save you money long term. Plus, it can help you build equity in your home at a faster rate. Your equity increases when you pay down the principal balance on your mortgage.

Get a lower interest rate and monthly payment

And in many cases, a lower interest rate also means a lower monthly mortgage payment. This interest savings could allow you to pay off other high-interest debt, add to your savings account or put more dollars toward retirement.

Refinancing can help you increase your long-term savings in two main ways: A lower interest rate can decrease the mortgage interest you pay over the life of your loan. A smaller monthly payment—which may mean you'll be paying a mortgage for longer—can allow you to save and invest more for retirement now.

Refinancing can save you money if you get a lower interest rate, but you could also end up paying more if you refinance simply to extend the loan term. Refinancing can help you consolidate debt or tap your home equity for extra cash for renovations, but it can also lead to more debt.

In some cases, refinancing is a wise decision. In others, it may not be worth it. Refinancing is generally easier than securing a loan as a first-time buyer because you already own the property. If you have owned your property or house for a long time and built up significant equity, refinancing will be even easier.

Refinancing allows you to lengthen your loan term if you're having trouble making your payments. The downsides are that you'll be paying off your mortgage longer and you'll pay more in interest over time. However, a longer loan term can make your monthly payments more affordable and free up extra cash.

In a cash-out refinance, a new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash. You usually pay a higher interest rate or more points on a cash-out refinance mortgage compared to a rate-and-term refinance, in which a mortgage amount stays the same.

Refinancing the mortgage on your house means you're essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you're left with just one loan and one monthly payment.