How to Pay Off Debt Faster with These 3 Refinancing Strategies
Many homeowners don’t know they have an option to refinance their mortgage or a loan to pay off debt faster. Even if a mortgage term has been agreed upon and signed, homeowners can opt for changes before the contract is completed. Many are taking advantage of these three refinancing strategies to pay off their debts faster.
What is refinancing? In short, refinancing a mortgage or a loan is getting a new loan to pay off your current loan. Ideally, it has a better rate and terms than your previous loan. This “new” loan can be the same loan, or you can use the new loan money to more quickly resolve other debts.
Strategy #1: Remove Private Mortgage Insurance (PMI)
You might have PMI as part of your monthly payments if you used an FHA loan to buy your home with a low 3% down payment or if you did not have 20% of the home’s price to put down at purchase on a conventional mortgage. PMI can be a considerable portion of your monthly mortgage payment, ranging from 0.5% to 1% of the total principal loan amount. For example, if the loan amount is $100,000, then the PMI payments may be as high as $100.00 per month. By refinancing to a conventional loan, you may have an option to remove this additional cost.
Check with your DECU mortgage loan officer about this option. Removing PMI means you can use that money to pay off the principal balance, hence paying off your debt faster.
Strategy #2: Shorten loan terms
Although making the same payment doesn’t sound like a good deal, if your refinanced loan has a lower rate, you can substantially shorten your loan terms. Chances are if you bought the home when the loan interest rate was high because your credit score wasn’t good, then refinancing at a later time will give you a better deal. You are also more likely to have better credit score than when the initial loan started.
Getting another loan with better terms and rates can shorten your timeline. Therefore, you’ll have more time to pay off other outstanding debts.
Strategy #3: Cash-out refinance to pay off monthly debts
The idea behind getting a new loan to pay off other debts may not be a popular one, but this strategy can work in some situations. Therefore, it will help to reduce overall debt.
For instance, the house that was originally purchased was in rough shape. Over the years, it’s been remodeled and worked on and – after re-evaluation – the home equity went up. With a cash-out refinance, the difference in home equity goes to the borrower in cash. Ultimately, this allows the borrower to use that cash to pay off all other debts such as a car loan, student loans, or put it back on the principal balance to pay off the mortgage faster.
If you’re wondering if refinancing a mortgage is right for you and when to know the best time to refinance, you’re not alone. Give DECU a call or contact us for a consultation. Our mortgage loan officers are more than happy to discuss your options and explore the best course of action for your situation.