Refinancing your home can be a smart financial move that can help you save money on your monthly mortgage payments or shorten the length of your loan term. However, refinancing can also have an impact on your home equity and long-term financial goals.
What is home equity?
Home equity is the portion of your home that you own outright. It’s calculated by subtracting the amount you owe on your mortgage from the current value of your home. For example, if your home is currently worth $500,000 and you owe $300,000 on your mortgage, your home equity is $200,000.
How does refinancing impact home equity?
Refinancing can impact your home equity in two ways. First, if you refinance to a new loan with a lower interest rate or shorter loan term, you’ll be paying off your mortgage faster. This means you’ll be building equity in your home at a faster rate.
On the other hand, if you refinance to a new loan with a longer loan term or a higher interest rate, you’ll be paying more interest over the life of the loan. This can slow down the rate at which you’re building equity in your home.
It’s important to consider how refinancing will impact your home equity when deciding whether to refinance your home.
How does refinancing impact long-term financial goals?
Refinancing can also impact your long-term financial goals. For example, if you’re planning to retire in the next 10 years, you may want to consider refinancing to a shorter loan term so you can pay off your mortgage before you retire. This can help reduce your expenses in retirement and give you more financial flexibility.
On the other hand, if you’re planning to stay in your home for the long term, you may want to consider refinancing to a longer loan term to lower your monthly mortgage payments. This can free up more money in your budget for other expenses.
It’s important to consider your long-term financial goals when deciding whether to refinance your home. Think about your plans for the future and how refinancing can help you achieve those goals.