There are many reasons why homeowners might like to refinance. Often, it is done to access a lower interest rate and, as a result, reduce the costs of a mortgage. For cash-strapped consumers needing to ease the pressure on their monthly expenses, however, refinancing can be an especially good option.
First-time homebuyers are often the most financially stretched, but mortgage repayments usually become easier over time. Surprise expenses or a sudden reduction in income can bring financial struggles, though. Refinancing could help in such circumstances.
For those with a good credit score, moving a mortgage to a lower interest rate is a good idea. Even for those who can't access a competitive rate, refinancing can still help by extending the term of your mortgage. While this means that the mortgage becomes more expensive, with more interest accumulating over time, it can help to reduce your monthly costs in the short term.
For example, having paid a decade of repayments on a $300,000, 30-year fixed-rated home loan with a 4 percent interest rate, you would be left with approximately $235,000 to pay. This works out to a monthly cost of around $1,430. Refinancing the loan back to a 30-year term, even at the same interest level, would cause your monthly payments to drop to $1,120 and give you an extra ten years to pay off the mortgage.
In extreme cases, refinancing this way can make a huge difference to borrowers who might be worried about potential foreclosure on their home. If you can access a lower mortgage rate, such a move could also save you money.