On The Question of Refinancing A Mortgage On Your House

Filed in Refinancing Home Mortgage on Sep.08, 2009

Refinancing your house means clearing off your existing mortgage and creating a fresh mortgage on it. The two pertinent questions that you face are: Why should one refinance a house? When should one refinance a house? We’ll explain the ins and outs of house refinancing in the following paragraphs, so stay tuned!

There are two common reasons to take a fresh mortgage on your house. Your current mortgage is an adjustable rate mortgage (ARM) where the interest you pay varies according to the market rate, and the interest rate on real estate is showing an upward inclination. If this is the case, then you should refinance your house with a fixed rate mortgage where the rate is less than or near about your current rate of interest. The other common reason is that you need a loan real soon. Look to refinance your house with a mortgage that allows you a cash component.

Taking advantage of lower interest rates is good sense. But be warned that the fat savings you anticipate may shrink to Size Zero! Your mortgage company will ask you to pay a penalty (pre-payment penalty) for prematurely terminating the mortgage. Bearing this in mind, re-compute your savings on interest. Maybe refinancing won’t be worthwhile after all!

One situation where refinancing is inadvisable is when you are not sure of staying in that house for the next few years. You will have to pay the pre-payment penalty when you refinance. Given a moderate interest differential, it will take you maybe three years to break even. If you have to move before reaching the break even point, the balance will add to the second pre-payment penalty when you move, and there will be no way of recovering that.

If you want to pay up the mortgage earlier than agreed upon, you have to pay a penalty, often called a pre-payment penalty. The usual amount of the penalty varies from two years’ interest right up to five years’ interest. Factor these figures in when deciding about refinancing your loan. That very profitable proposition may actually turn out to be a losing proposition in the end!

However, if you are going to stay in the same house and you are offered a refinance deal at a lower rate of interest, then take the deal. It doesn’t matter that the difference in rates is marginal. The difference will accumulate to quite an amount in the long run.

“While I’m at it I may as well take a loan for a bit more than that required to clear off the existing mortgage.” That inflated mortgage amount will have to be paid back. That means bigger installments. Once again, run a check yourself or get an accountant friend to do so, to see whether you end up with a net saving in lower interest payments or not. Also see whether you can handle the new installments comfortably or not.

You can earn a hefty saving by refinancing your house provided you time it right, which is when the interest rates are low. Just make sure of two things: that you can handle the payments comfortably, and that the mortgager is trustworthy.

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Home Mortgage and Refinancing

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