Personal Finance

Why Refinance your Home to Consolidate Bills

As life changes affect your monthly budget you may feel as though the purse strings are getting a bit tighter than you can handle. Everyone goes through this budget pinching experience at least once in life; either due to a new baby, job layoffs, or over indulgence with the credit cards. One financially savvy way to get out of the pinch if you own your home is by refinancing your home. Here’s why.

image1Consolidating to a Lower Interest Rate

By refinancing your home and taking additional cash out to pay off credit cards and revolving credit accounts which have higher interest rates, you save money in the long run since the interest rate on your mortgage will be substantially lower than what you were paying on revolving lines of unsecured credit.

This kind of loan will lower your overall monthly payments by eliminating credit card debt. The important thing to remember is to lock away these cards and avoid using them unless you have an emergency so that you do not end up with additional monthly payments.

Tax Incentivesimage2

Mortgage interest is tax deductible, whereas credit card, auto loans, and other revolving credit lines are not. By maintaining a mortgage you automatically get to claim any mortgage interest paid within the year as a deduction on your year-end taxes.

For single individuals with no dependents or older people whose dependents have grown up and moved out on their own, the mortgage deduction can help you minimize your taxes owed.

image3Lower Mortgage Interest Rate

Refinancing when mortgage interest rates are low is an excellent way to lower your monthly payment as well as the total amount that you will pay for your home. This lower monthly payment can provide you with a little extra breathing room when the budget is tight, or a bit of investment capital to put towards saving if you are just refinancing to lower your interest rate.

Remember when refinancing to a lower rate and taking cash out that you may not see the monthly payment go down by much. However, the cash that you take out of your home’s equity can be used to pay off higher interest items or invest in a fund that is earning a higher interest rate than your mortgage interest rate; so that even though you will be paying interest on the money you took out of your home, you will be making money at the higher interest rate.

Investment Capitalimage4

If you don’t plan on moving in the near future and wish to get a jump start on your retirement savings, putting your home’s equity to work for you is a great way to invest. Refinancing so that you can have access to your home’s equity, and investing that equity in interest earning accounts, bond, or mutual funds allows you to earn interest on money that would otherwise be locked into your home’s mortgage payments.

The key to this is to make sure that you take into account the increase in monthly payments so that you remain able to make your payments; as well as investing the funds into products that make a higher interest than your mortgage interest rate is.

With tax incentives and lower interest rates than revolving credit companies can offer, refinancing your home to invest in retirement or shrink monthly bills is a great way to make use of your existing equity in your home and make your money work for you.