Is it Financially Wise to Refinance my Home?

By | November 26, 2013

Refinancing is the process of replacing your current home mortgage loan with a different one, either from the same mortgage lender or a different one. Essentially, you pay off the original mortgage by replacing it with another, with alternate terms and interest rate. Many people choose to refinance their home for a number of reasons, such as paying off their mortgage faster or saving money.

Your mortgage loan will have a couple of important factors – namely the mortgage term (the length of time before it is paid in full) and the interest rate. Usually, home refinancing is done to alter one or sometimes both of these factors. Some people choose to refinance so that they can lengthen the term of their mortgage and make their monthly payments more affordable, or to shorten the term of the mortgage and pay it off faster. Also, refinancing can also be used to access the equity in your home so that you can invest it, perhaps in a renovation.

Refinancing your mortgage can be a smart financial move – but not in every situation. Before you make the decision, it is important to take a look at the costs associated with the process, your current financial situation and what a refinance will accomplish.

Consider the Extra Costs

While refinancing your mortgage has the potential to save you money in the long run, it can cost you a lot in the short term. This is because you will need to pay closing costs, attorney fees, title insurance and several other expenses. You will also be responsible for taxes, transfer fees and an appraisal. When you are considering whether or not to refinance, don’t forget to factor this in.

Before deciding whether refinancing is a good idea, you should figure out whether or not the savings that you will obtain from the lower interest rate on the new mortgage will be enough to offset the costs that you will experience.

Can You Get a Better Interest Rate or Better Features?

Generally speaking, it is usually worth refinancing your mortgage if you can get a lower interest rate. This means that you amount that you pay over the years will ultimately be less. However, always factor in how many years it will take to recoup the closing costs. Figure out how much you will save each month, so that you can determine what the advantage is over the years.

Also, sometimes refinancing your mortgage will allow you to get a different deal with features that suit your lifestyle better, such as the mortgages at Newcastle Permanent that offer repayment holidays and the ability to make additional repayments when you want.

Has Your Credit Score Improved?

If you didn’t have a great credit history when you got your first mortgage and it has improved since then, it might be a smart decision to refinance your home. If you have been making your mortgage payments on time for the last few years, your score will have improved and you will likely qualify for a lower interest rate.

However, if you have accumulated a lot more debt since then, or your income has declined, you might not qualify for a lower rate because your debt to income ratio is too high.

Do you Have a Second Mortgage or Home Equity Loan?

Another situation where refinancing your home can be advantageous is when you have a second mortgage or a home equity loan. In this case, you might be able to save a lot of money when you refinance, as you can incorporate these into your primary mortgage. When you add up all of these loans together, you will pay one low rate on the entire amount.

These are just a few important questions to ask yourself when determining whether it is financially wise to refinance your home. If you are still not sure, talk to your mortgage advisor for expert advice on your situation.

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