Saving more money each month can have a big impact on your overall finances — and one way a lot of Americans are trimming their expenses these days is by refinancing their mortgage. Read on to find out when a refinance may make sense for you, and what you can do with the money you save by doing it.
When is it a good idea to refinance?
Many homeowners look to refinance when interest rates dip lower, with the goal of one or more of the following:
- Lowering their monthly mortgage payment by cutting the interest rate
- Reducing their loan term
- Consolidating debt
- Getting cash from their home’s equity
“It makes the most sense when the new loan will save or make the borrower more money,” explains Nicola Smith Jackson, an Atlanta-based financial advisor and wealth strategist. “In these challenging economic times, stabilizing or improving one’s financial security should be a main focal point.”
Even though the savings associated with some types of refinancing can be attractive, there are times when it’s best to hold off. If you’re moving soon or if the time left on your mortgage won’t allow you to recoup the closing costs, it may be best to stick with your current loan.
Here’s more on when it’s smart to refinance.
What to do with refinance savings
If you decide to refinance, it’s important to have a strategy to make the money you’ll ultimately be saving work for you. Here are some ideas on how you can leverage that extra cash:
1. Start a business
If you have a goal to start a business, consider using your mortgage refinance savings to help fund the new venture. Look for a path with low startup costs, if possible.
“This is an opportunity to create your own financial outlook without waiting on anyone else to decide when you can go back to work,” says Smith Jackson, citing the coronavirus-driven layoffs.
2. Beef up your retirement savings
“Refinancing to a lower interest rate may free up significant amounts of cash, which can be used during retirement,” says Shelby McDaniels, channel director of Chase Corporate Home Lending.
It goes without saying retirement saving is a high financial priority, so adding to your nest egg can be a smart way to allocate your refinance savings. Talk to your financial adviser to determine which retirement saving strategies will work best for your situation.
3. Get out of debt
If you’re carrying high-interest debt, try to use your refinance savings to pay it off. It’ll help free you up even more for other financial goals.
4. Build your emergency savings
Having ample liquid cash in reserve can offer you peace of mind when the unexpected happens — think job loss, illness or a big car repair.
For an emergency fund, “a three- to six-month savings is no longer enough money with our current economic conditions,” says Smith Jackson, so “make the goal 12 to 18 months.”
A cash-out refinance can help you start or add to your emergency savings.
“With a cash-out refinance you get a new mortgage that’s greater than the amount of your existing mortgage principal but less than the current value of your home,” explains McDaniels. “You use the money from the new loan to repay your original mortgage — and pocket the rest of the cash.”
5. Continue your education
Attaining higher education can lead to a more stable financial future, despite the upfront cost.
“A cash-out refinance can give you money in a lump sum that you can use to pay for education expenses,” McDaniels says. ‘The refinance interest rate may be lower than other education loan options available to you.”
If you refinance for a lower monthly payment without pulling cash out of your home, you can also apply those monthly savings toward education costs.
6. Invest in real estate
Smart investments make your money work for you, and investing in real estate is one way to do just that. If your refinance will net you significant savings, repurposing the funds for a real estate investment may be an option.
Smith Jackson suggests that you partner with a trusted professional — such as a real estate agent, financial adviser, attorney or all three — to guide you. Your strategies might include purchasing a rental property, flipping a home or participating in a crowdfund.
7. Make home improvements
“Many lenders have refinance options that can give you extra funds to help renovate or repurpose your home to fit your needs or style,” McDaniels says.
If doing a cash-out refinance, you can use the funds to make upgrades to your home, which can lead to a bump in its value if you plan them strategically. Depending on the type of renovation you do, it can also afford you a tax benefit, so it’s worth considering to maximize your savings.
8. Get adequate insurance
Having proper insurance isn’t a luxury, but a necessity. With the added margin in your budget from refinancing your mortgage, it might be time to reevaluate your coverage, including health, income replacement, disability, car and life insurance.
“Ask a professional which policies are suitable for your income goals and/or health conditions,” Smith Jackson recommends.
9. Pay off your mortgage faster
If you’re saving serious money each month thanks to your refinance, you can reapply the savings to your new loan principal. You’ll own your home free and clear that much sooner.
There are a few ways to prepay your mortgage, including making an extra payment each year or making a one-time lump-sum payment. Your lender will need to sign off on your strategy.
How to get the most out of your refinance
When mortgage rates fall, it can be a good time to explore refinancing. Here are a few strategies to get the most savings as you compare your options:
- Determine your goals. Be clear about both your long-term and short-term objectives in refinancing. “It’s important to establish your goals to determine which mortgage product meets your needs,” explains McDaniels. “For example, if your goal is to reduce your monthly payments as much as possible, you will want a loan with the lowest interest rate for the longest term. If you want to pay less interest over the length of the loan, look for the lowest interest rate and at the shortest term.”
- Shop around for the best lender. Every lender’s offerings will vary slightly, and those differences can mean more or less savings for you. “Review different lenders and options to determine the best combination of rate, costs and service,” McDaniels suggests. “Doing your research and scouting out lenders and their fees, interest rates and availability can help you find a refinance deal you’re happy with.” You can use Bankrate’s mortgage refinance calculator to estimate your new monthly payment and evaluate your options.
- Find someone you trust. The refinancing process can be confusing, so it’s important to use a trusted lender. “Having a reliable lender to answer your questions can make the difference between a smooth, easy process and a tough experience,” McDaniels says. “A dependable lender will help to keep everything on track and on time and make a significant contribution to your personal peace of mind.”