A Mortgage Refinance Primer
Mortgage refinance is an option most house owners look at from time to time. The big question they ask themselves is: Should I? Well, that depends on the particulars of the case. Generally people go in for mortgage refinance either to save money on the interest they pay, or to consolidate sundry debts. The crucial factors that merit consideration when deciding the ‘Should I?’ question are noted below for your information.
Maybe you have a number of small monthly repayments and these are becoming increasingly difficult to manage. You can refinance the mortgage and get a loan large enough to pay off all the small debts at once. You can then concentrate on paying a single monthly repayment. This makes things more manageable.
Most people think that the interest they pay on mortgages is unjustifiably high, and seek ways and means to reduce the interest burden. This is intelligent thinking. The point to consider is whether the market rate is showing every intention of reaching for the sky. If it is, and if your present mortgage is based on the variable market rate, then this is a good time to opt out of the present mortgage and refinance the mortgage with a fixed interest plan, where the interest rate is lower than the average market interest rate computed over the duration of the mortgage.
Don’t get carried away with the idea that refinancing is advisable for all situations, or that it will benefit you at all. There are many situations when refinancing can cost you heavily.
The problem is that when you go to a refinancing agency they fail to mention the actual expenses you will have to incur to refinance your mortgage. Their excuse is that these are ‘external’ expenses and not their concern. Therefore you may be lulled into believing that the refinance scheme is going to save you a hefty sum over the mortgage period. Too late you find that you have to pay a number of incidental fees, charges and penalties, which can set you back quite a lot, and may nullify the savings you’ve counted on. There is no point in changing your financier if it is not going to save you any money.
When you consider refinancing, the first thing to do is to survey the market. Find out all the plans and schemes being offered by different companies. Make a comparison chart showing all the salient features and savings of each plan. Don’t restrict your survey to just your local companies. Go online and get information on various plans offered in your area.
Find out all the penalties and fees that refinancing companies may extract from you upfront. For example, there is an origination fee or points, which is taken before the refinance plan becomes operational. There might be a plan where the interest rate is slightly higher but you don’t have to pay origination fee. This may turn out to be better for you.
Refinancing is advisable if your net savings is significant. If not, you may as well keep the current mortgage going. Don’t go in for refinancing if you think you may have to move before the fresh mortgage period has time to play itself out. Such a move will require you to foreclose the fresh mortgage which entails a huge penalty!
Refinancing your mortgage is a good way to save money by opting for a lower interest rate regimen. It is also a good way of consolidating your debts. But that is not be construed as a clean chit for every situation. Refinance has to be debated on a case by case basis according to the particulars of the situation. So what works for Bob may not work for Bill. The most important thing is to perform an exhaustive market survey before going in for refinance. Be very careful in computing the refinancing costs. Ask other people who have taken this route about their experiences and seek their advice. Be wary of hidden charges. These surprise charges may make the difference between saving $10,000 and paying out $500!
