In personal finance, you’re just looking to grow your assets and keep your liability at bay. Having a good equities strategy is one important piece to that, but so is having a mortgage that doesn’t give you headaches.
When interest rates go down, like they have in the past year or so, you have an opportunity to cash in on that. literally.
If you were paying 5% on your mortgage debt and now you can get that liability down to 4% debt, wouldn’t you want to do that? It gives you more financial flexibility and more value out of your home.
There are several ways to refinance your mortgage. We’ll focus on the most common one.
The first is called a rate-and-term refinancing.
You owe principal, or the full amount you borrowed in several years, but you want that lower interest rate.
Pay that principal back to your lender right now and your interest payment on that loan goes away. It might be tough to part with that lump of cash, but if you keep you budget in check for a few months, you’ll be fine. And the interest payments are gone.
Now, re-borrow that amount (so the cash comes back to you) at a lower interest rate. Now you do have inters payments due, but they’re smaller payments. You now owe the principal again because you kind of re-borrowed, but your interest rate fell.
Now enjoy the value of your home, should it rise. And furthermore, enjoy what is supposed to be an incrementally higher net worth.
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