The Benefits Of Refinancing Also Depend On The Age Of Your Mortgage

Category: Finance, Mortgages.

When you refinance a mortgage, you use money from a new mortgage to pay off your existing one. It should be noted that there are some costs associated with the process.

When done at the right time, refinancing can be an excellent way of reducing your total debt or providing you with significant savings on your monthly mortgage payments. Refinancing typically costs 3- 6% of your current outstanding mortgage principal. In the long run, refinancing at the, however right time for the right reasons will save you more than getting that second mortgage will cost. This is mostly due to the fact that taking out a new mortgage involves payment of closing costs, and in some situations you may be liable for a prepayment penalty on your existing mortgage. Benefits of Refinancing. If you purchase your home at a time when interest rates are high, refinancing once those rates drop can save you a large chunk of money. For most people, the sole benefit of refinancing is to obtain a mortgage with a lower interest rate and save money on future repayments.

However, as noted above it is important to consider the costs when you are deciding whether or not to refinance. If, for example, you are six years into a 30 year mortgage, and find that you are able to afford higher mortgage payments, you might consider switching to a 20, 15 or 10 year mortgage. Refinancing can save you thousands of dollars in interest if your second mortgage has a shorter term than the first, even if you do not lock in a lower interest rate on the second mortgage. This will not only mean significant savings in the amount of interest you pay, but will also allow you to build up equity in your home more quickly. However, this does mean that you will be borrowing more money than you currently owe, meaning that you will also be extending the terms of your mortgage. Another good reason for refinancing is in situations where you want to exchange some of the equity in your home for cash.

In general, this is only a good idea when you plan to use that cash to add value to your home, either by remodeling or by building onto your property. When is Refinancing a Good Idea? Refinancing is not a good idea when you plan to use the money to pay off credit card debt, or buy assets that depreciate quickly, such as a new car. In some situations, refinancing is unlikely to help you pay off your mortgage faster or reduce your monthly mortgage repayments. In this case, your lower credit score will usually mean you cannot get an interest rate that is favorable enough to lower the cost of the new mortgage enough to make refinancing worthwhile. For example, refinancing is almost never a good idea when your credit rating is worse than it was when you got your original mortgage. In general, refinancing is a good idea when: You will be living in your home long enough for the costs of refinancing to be recouped by the savings you make on your new mortgage payments.

Your new loan is for less than 80% of the current value of your home. In most cases this will take five to seven years. Your new loan balance does not exceed the total amount owing on your existing mortgage. If you have an adjustable rate mortgage( ARM) , refinancing may be a good option even in situations where some of the above points do not apply. Your credit rating is equal to or higher than it was when you took out your original mortgage. For example, if you financed your home with an ARM when interest rates were low and they now look set to rise over the next few months, refinancing to a fixed rate mortgage may be a good idea.

Sticking with the ARM is risky in the long term, and it is often more prudent to switch to a fixed rate mortgage if you plan to keep the property. Another good reason to refinance out of an ARM is in a situation where you originally bought your home with the intention of moving within a few years, but have since decided to stay there for the long term. The benefits of refinancing also depend on the age of your mortgage. Taking out a new mortgage at this stage will reduce the equity you have in your home if you borrow more than your current outstanding balance, because conventional mortgage repayments are front loaded with interest, and by this stage your repayments are mostly for principals. If you are twenty years into a 30 year mortgage, refinancing should be approached with caution. If you have already paid off more than half your mortgage balance, refinancing will not usually save you money, even if you do lock in a lower interest rate.