Owning a home is a major financial responsibility, and keeping housing costs as low as possible each month is a priority for many homeowners. Refinancing exchanges your existing mortgage for a new home loan and can potentially reduce what you pay each month substantially through a lower note rate.
Traditionally, simply refinancing directly may not yield the strongest possible terms if home values have appreciated significantly relative to your remaining loan balance. However, leveraging additional collateral through assets like accumulated home equity or investment accounts can strengthen your financial profile for lenders. This in turn allows qualifying for even more competitive refinance terms compared to just going through the standard process.
In the following post, we will explore how refinancing with extra security like equity can help lower monthly housing costs through better interest rates and flexible options.
What Is Refinancing?
Refinancing a home loan involves paying off your existing mortgage and replacing it with a new one. This usually results in different loan terms and conditions than your original loan. The basic refinance process involves applying for a new loan with your existing lender or a new lender, getting your property appraised, and transferring funds to pay off your original mortgage balance.
Refinancing can provide benefits like lowering your interest rate, which in turn lowers your monthly payments. It may allow switching from an adjustable to a fixed-rate loan to gain stability. You may be able to reduce your loan term to pay off your home sooner or free up cash by taking equity out of your home.
However, refinancing on its own with additional collateral or security may only sometimes result in a lower rate, especially if your loan-to-value ratio is high or your credit has changed. Adding assets like home equity or investments as additional collateral can help strengthen your financial position and qualify you for better-refinancing terms from lenders. This is known as refinancing with security.
Refinancing with Additional Home Equity or Other Assets
When refinancing a home loan, lenders evaluate the loan-to-value (LTV) ratio to assess risk. LTV compares the outstanding loan balance to the home’s assessed value. A lower LTV indicates less risk for the lender. Leveraging additional collateral like home equity or investment accounts when refinancing provides an opportunity to potentially lower the LTV and qualify for a better interest rate.Click here to learn how to calculate the loan-to-value ratio.
By including assets as part of the refinance transaction, the total secured value increases. For example, if a home is currently worth $300,000 but has a $250,000 loan, the LTV is 83.3% ($250k loan divided by $300k value). But if the homeowner can contribute $50,000 in equity to the new refinance, the loan stays at $250,000 but is now backed by total collateral of $300,000 home value plus $50,000 equity, dropping the LTV to 75%.
The amount of rate improvement you could see varies based on factors like your credit profile and how much additional collateral you provide. But as a general rule, lenders may reduce the interest rate by 0.125–0.25% for each 10% decrease in LTV. So in this example, an approximate 0.25% rate cut could be achieved through the 8.3% LTV improvement. The resulting lower rate then translates to reduced monthly payments calculated over the new loan terms.
Also, when you refinance using additional assets as security, lenders see you as a lower-risk borrower since you have more of your own money on the line. This makes them more comfortable offering you a better interest rate. Even a small rate reduction of 0.25% on a 30-year $250,000 mortgage can lower your monthly payments by around $50–60. The more equity or assets you can pledge, the better the terms you may qualify for from lenders.
Over the long run of a mortgage, the cumulative savings from even a small rate decrease can really add up. So the more equity you have available, the greater the opportunity to decrease costs through refinancing.
Other Benefits of Refinancing with Security
While lowering your monthly mortgage payment is often the primary goal of refinancing, there can be some other advantages to considering this option as well. Refinancing with added security from home equity or other assets allows you to qualify for very competitive rates. Companies like besterefinansiering.no/refinansiering-med-sikkerhet can help you understand this process better and also help smooth things out. This presents opportunities beyond just payment savings.
One benefit is the ability to potentially reduce the payoff term of your loan. For example, if you refinance a 30-year loan down to a 25-year or even 20-year term, you’ll significantly cut interest costs over the life of the mortgage since you’re paying it off sooner. Shortening the amortization schedule also results in more of each payment going toward the principal balance each month. See https://www.wikihow.com/Calculate-Amortization to learn how to calculate amortization. You may also be able to tap into some of the equity in your home through a cash-out refinance. Having access to lump-sum cash could allow for paying off high-interest debts, funding home renovations, consolidating other loans, or meeting other personal financial goals more affordably.
Refinancing also triggers a new appraisal of your home’s value. If it has increased substantially, you may now have access to even more equity that wasn’t previously available to leverage as collateral. On top of all this, you get the security and stability of locking at a fixed, low rate for the long haul.
Considerations Before Refinancing with Additional Collateral
While refinancing with added security offers benefits, there are important factors for homeowners to evaluate upfront:
Consult Your Lender
Schedule time to meet with potential lenders and get pre-approved loan estimates. Ask about the required documentation, current rates and fees, and how much lower your payment could be.
Review Closing Costs Carefully
Refinancing involves origination fees, appraisal costs, taxes, and other expenses added to your loan. Make sure you understand these upfront costs.
Analyze the Break-even Timeline
Calculate how long it may take before your interest savings from a lower payment exceed the closing fees. Aim for faster breaks if possible.
Inspect Your Credit
Make sure your credit score and history qualify you for the best available terms. Consider steps to improve problem areas in advance if needed.
Consider Economic Factors
Assess projected interest rate trends and your job or income stability over the new loan term. Slowing economies could impact qualification later if circumstances change.
Assess Long-term Plans
Look ahead for 5–10 years to determine if you intend to keep the home and see value in committing to another long-term loan.
Discuss Tax Implications
Consult a tax professional, as refinancing may disallow some deductions or benefits tied to the original loan you had.
Careful planning is key to ensuring refinancing with added security makes long-term financial sense for your personal situation and goals. Meeting with trusted advisors can provide invaluable guidance.
Conclusion
Refinancing your existing home loan with added security in the form of home equity or other assets can provide significant financial benefits for homeowners.
By strengthening your application to lenders, you open up opportunities to take advantage of today’s historically low-interest rates through a refinance. This makes it possible to potentially reduce your monthly housing payments by hundreds of dollars going forward. With extra collateral, you may also qualify for shorter loan terms, cash-out options, or other favorable terms.
Even small rate decreases can translate to big long-term interest savings over the life of your mortgage. If you have built up your home value or own other real estate or investments, speaking to a loan officer about refinancing with security could help lower your costs and put more money back into your budget each month. Now may be the ideal time to explore refinancing options and access today’s most competitive rates.
