When you refinance your home loan, you take out a second loan to pay off the first mortgage. You can also opt for refinancing to pay off other debts or for an emergency expense such as medical or tuition bills.
A major benefit of refinancing is that it gives you the opportunity to switch to a lower interest loan, thus reducing your monthly payments towards the loan. Another benefit is that you can shorten the loan term by moving to a smaller-duration loan. Switching from a twenty year loan term to a ten or fifteen year term will save you a lot of money in the long run. It will also help you pay off debt sooner and give you financial security.
If you have taken out an adjustable rate mortgage and the current interest rates are low, then you can shift to a fixed rate mortgage through a refinance to lock-in the low rates. You can also refinance your mortgage to get rid of Private Mortgage Insurance or PMI, which will cut down your monthly expenditure on the loan.
A cash-out refinancing is a great option that lets you use the equity built up in your home for important expenses. In such a deal, you take a refinance loan amount that is greater than the outstanding amount on the existing mortgage. The extra cash you get can be diverted towards home renovations, college fees or credit card bills.
