With financial planning season right around the corner and interest rates down, refinancing a mortgage could be the solution to not just one but at least five popular financial goals. In addition to meeting multiple money goals, a mortgage refinance may even allow homeowners to reach these goals faster. Here are five ways refinancing can be a powerful tool when it comes to financial planning.
Boosting long and short-term savings is a common goal for most American families, though many haven't yet achieved it. In fact, 50 percent of respondents to PWC's 2014 Employee Financial Wellness Survey said they didn't have enough emergency savings to meet an unexpected expense. Refinancing may help meet this important need by reducing a homeowner's current mortgage payment, freeing up cash that can then be applied to building up an emergency fund.
Once an emergency fund is established, the monthly savings generated by a home refinance can then be funneled to longer-term savings goals, such as for a child's college fund or towards retirement savings.
Lower Overall Debt Payments
Many families struggle to meet a variety of monthly debt payments, including credit card bills, unsecured loans and credit lines. Property owners with equity may benefit from a cash-out refinance. In this situation, mortgage proceeds are used to pay off the current home loan as well as other outstanding debts, lowering a family's monthly debt payment to a more affordable amount. It may also help put cash in a homeowner's pocket, because there is now a higher overall mortgage balance which may be tax deductible, according to the IRS.
Be Debt-Free Faster
Homeowners may speed up their goal to be debt-free faster by refinancing. This may reduce their mortgage term, shaving years off their loan, and if the shorter term also comes with a lower interest rate, the time to pay off the balance may be shortened even more.
Lower Interest Costs
Financial goals for families often include some form of cost-cutting, and what better place to start than with the biggest debt most households have? As long as interest rates remain low, refinancing from a higher rate mortgage to a lower rate mortgage can save families valuable dollars that would have gone toward interest. For example, homeowners who refinanced into a lower rate mortgage in the first three quarters of 2014 will save a whopping $1.5 billion in interest over the next 12 month period, according to Freddie Mac's third quarter refinance report. A lower rate means reduced interest costs, which frees up money that can then be applied to the mortgage principal, or for other monthly family expenses, or to help meet financial savings goals.
Help Set Monthly Budgeting
Homeowners with Adjustable Rate Mortgages (ARMs) know they may be facing a rate hike when it's time to lock in their rate and that may mean trying to fit a higher monthly payment into an already tight budget. If financial goals for the coming year include creating and following a household budget, homeowners may want to consider refinancing an ARM into a fixed rate mortgage to provide the peace of mind that comes with knowing exactly what monthly household cash flow will be.
Refinance to Meet Household Financial Goals
A mortgage refinance can help families meet multiple financial goals, including boosting savings and defining a monthly budget. It may also be a great way to pay off debt sooner, lower monthly payments, and save on interest costs. Homeowners setting short and long-term financial goals should talk to a lender about the costs of refinancing to help determine how much of a benefit refinancing will be to help them succeed at meeting those goals.