Refinancing, when it refers to your home mortgage, basically means re-obtaining the financing to pay off the original debt and start paying the new loan with better terms.
The new loan is generally the same size as the old one and uses the same property, your house as security or collateral.
There are several reasons to go for refinancing: · To switch over to a fixed mortgage from an adjustable one.
This will ensure your monthly payments stay exactly the same for the duration of the loan.
It is useful if you expect the interest rates to rise in near future.
· To lower the interest rate.
· To reduce the term of longer mortgages.
· To obtain money using the equity of the property.
· To use the cash out to consolidate debt.
Lots of property owners pay interest rates that are too high and are locked into loans that do not fit their financial goals and income levels.
Your mortgage payments should not account for more than one-third of your monthly income.
How can you judge whether refinance is a sensible thing to do? Weigh the interest savings you will get against all the charges and fees you will pay to refinance.
If the cumulative savings are more than the refinance costs, you can go ahead with the option.
The refinance option becomes less attractive if there are huge prepayment fees on the old mortgage.
This increases the cost to refinance.
Should you refinance? This question can be answered by asking yourself two other questions: · Do you plan on staying in this home for the complete duration of the term of the loan, which is generally between 15 and 30 years? · Do you have equity in the property? Equity is the difference between the value of your home and the outstanding loan amount or mortgage pending on it.
· Are you getting financial benefit out of the switch or some other benefit like longer term of repayment? If the answer to the first question is a 'No' and to the second and third a 'Yes', you can benefit from the home loan refinance.
Equity is the crucial element in your decision to refinance.
It would be advisable to wait for up to five years before thinking over the refinance option, unless of course your property came with equity.
People tend to resort to refinancing for either cash outs or to decrease their monthly repayments.
Often people want both, but that is just not possible.
Whatever your motivation, you should have a minimum of 25 per cent equity in your home before you proceed.
This equity will be your comfort cushion and will also give more confidence to the lender in your repaying ability, which may mean better interest rates.
Refinancing can reduce your monthly payments, making it much easier for you to meet your expenses.
You can also potentially save interest payments amounting to thousands of dollars by the end of your mortgage.