Final answer:
Borrowers can benefit from increasing the outstanding principal upon renewing their mortgage when their home's equity has risen by using the additional funds for debt consolidation, home improvements, investments, or to benefit from lower interest rates if applicable.
Step-by-step explanation:
When a borrower renews their mortgage, and both the property value and their equity have increased, they can benefit from increasing the outstanding principal. As the homeowner's equity grows, the individual gains more leverage in terms of accessing larger loans through refinancing. This may be advantageous for several reasons:
- Debt Consolidation: The borrower may use the additional funds to pay off higher-interest debts, effectively consolidating their debt and potentially lowering overall interest payments.
- Investment: With a larger loan amount available, the borrower may choose to invest in home improvements that could further increase the property's value, or they may invest in other opportunities with the potential for high returns.
- Lower Interest Rates: If interest rates have fallen since the original mortgage was taken out, refinancing at a lower interest rate while increasing the loan amount can still result in lower overall interest costs compared to other types of borrowing.
Overall, people can leverage the increased equity in their homes due to market appreciation or improvements made to the property to secure a better financial position. It is important to consider the potential risks and costs associated with refinancing, such as fees, potential for higher total interest costs over the life of the loan, and the risk of foreclosure if unable to keep up with payments.