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December 16, 2024
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4 Ways Refinancing Can Benefit You as Mortgage Rates Drop


simonkr / Getty Images

simonkr / Getty Images

Realtor.com predicts that mortgage rates could dip to 6.5% by the end of the year, while Fannie Mae expects them to fall to 6.7%. The good news is that either way, mortgage rates are expected to drop after an aggressive rate hike campaign from the Fed in order to cool down rampant inflation. With many analysts predicting that mortgage rates will continue to dip in 2024, you may be thinking about refinancing your mortgage if you locked in a higher rate in the last few years.

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Refinancing a mortgage requires taking out a new loan to pay off the existing one, and this can be a wise strategy when mortgage rates are low. Refinancing can lead to lower monthly payments, quicker equity building, and potential cash-out options.

Here are the different ways that refinancing can help you financially as mortgage rates go down.

Also see creative ways homebuyers are paying lower mortgage rates.

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Lower Monthly Payments

Many people entered the real estate market during the peak of interest rates due to timing or life conditions. With mortgage rates dropping, they could finally see some relief in their budgets.

“When mortgage rates decrease, the most immediate benefit of refinancing is the potential reduction in your monthly payments,” said Andrew Latham, a certified financial planner and managing editor with SuperMoney.com. “For instance, if you originally took out a $400,000 mortgage at 8% and rates have now fallen to 6%, refinancing could significantly lower your monthly payments by around $540 a month.”

The reduction in monthly payments would free up cash from your budget so that you would have the funds for your other financial goals, like saving for retirement or paying off your debts. You also could use this money to treat yourself after allocating so much of your income toward housing payments.

It’s worth pointing out that lower monthly payments would likely be the main reason for refinancing a mortgage. However, you’ll want to ensure that the numbers add up because you’re going to have to spend money on closing costs.

You’ll want to complete the calculations to determine your break-even point based on the monthly savings from refinancing and the cost of going through the process. It’s generally not recommended that you refinance a mortgage if the new rate isn’t at least 1% lower.

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Shorter Loan Term

Another common advantage of refinancing your mortgage at a lower rate is the possibility of shortening the term of your loan without a huge increase in the size of your monthly payments.

Latham elaborated, “If you have a 30-year mortgage, refinancing to a 15-year mortgage at a lower rate can help you pay off your home sooner while saving on interest over the life of the loan. This is because more of your payment goes toward the principal rather than interest​​.”

Faster Equity Appreciation

Faster equity accumulation can be beneficial if you plan to sell your home in the near future or if you want to tap into your home’s equity for other financial needs, such as home improvements or college tuition​. You may not even want to access your home’s equity at the time, but refinancing can help you speed up the process so you’ll have more money available to you when you refinance your mortgage the next time.

“Lower interest rates mean that more of your monthly payment is applied to the principal balance rather than interest, assuming you keep paying the same amount every month,” Latham said. “This accelerates the pace at which you build equity in your home.”

Cash-Out Refinancing Options

If your home has appreciated in value, you can consider a cash-out refinance. If the remaining balance on your mortgage is $250,000 and your home is currently worth $350,000, you have $100,000 in equity. With cash-out refinancing, you could refinance your mortgage for $300,000 and get $50,000 back at closing.

“This allows you to take out a new mortgage for more than you owe on your current mortgage and receive the difference in cash,” Latham said. “This cash can be used for various purposes, including debt consolidation, funding major purchases or even investing in another property.”

These funds can be used however you wish, and you can remove financial pressure from your life. Many homeowners have done this to help pay for renovations around the house or to cover education costs for their children. The best part is that you can spend the money as you wish after tying up so much of your income in your mortgage payments for the last few years.

If you’ve been struggling with your monthly mortgage payments due to the high cost, you may want to review your options for refinancing as rates start to slow down.

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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: 4 Ways Refinancing Can Benefit You as Mortgage Rates Drop



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