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Refinancing your mortgage loan

Refinancing your mortgage loan

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Have you got a loan that is no longer working for you? Maybe your credit has improved, and you can get a better rate. Refinancing your mortgage can help you save money (or at least lower your payments), but sometimes it is just an expensive mistake. If you are considering refinancing, study up before you pull the trigger, according to

What is mortgage refinancing?

A refinancing transaction happens when you swap out an old loan for a new and better one. Your new loan pays off the old one, and you start making payments to the new lender.

Benefits of refinancing

A new, properly structured loan can improve your financial situation. In particular, you can:

Lower your monthly payment

Lower lifetime interest costs

Reduce risk, if you have an adjustable rate mortgage

Get cash out for other purposes

Consolidate debt and possibly get tax benefits

To see examples of the first two benefits listed above, it might help to run the numbers. Using a loan calculator, you can see how your monthly payment and interest costs will change if you get a lower rate. Note that your total lifetime interest costs might increase if you refinance into a loan that lasts significantly longer than your current loan.

Costs to refinance

Of course, mortgage refinancing is not free. You will pay fees to your new lender to compensate them for offering the loan. You may also pay for legal documents and filings, credit checks, appraisals, and more.

Even if a loan is advertised as a ‘no closing cost loan’, you are still paying those fees even if you don’t notice them. Generally, this happens through a higher interest rate.

Does refinancing make sense?

You need to weigh the pros and cons of your old loan and a new loan to decide. In general, mortgage refinancing is a good move when you can save money by locking in a lower interest rate or payment, shorten your loan term, or restructure debt optimally.

Once you understand the costs, evaluate how much you will save over time and how long it will take to recoup any up-front costs associated with mortgage refinancing. Will you keep the loan (or live in the home) long enough to make it worthwhile?

One way to look at this is with a basic break-even analysis – when will you come out ahead? But there is a lot more to consider.

When is it a good idea?

Mortgage refinancing is a good idea when you will truly benefit from a new loan. Some clues that it might be a good idea are:

Interest rates are low

Your credit has improved since you got your first loan

You will keep the loan for a long time

You can avoid getting stung by a high-risk mortgage

You can get an amortising loan instead of an interest only loan

When is it a bad idea?

You should avoid refinancing your mortgage if you will waste money and increase risk. Sometimes, having a lower interest rate and monthly payment can cost more in the long run – even if they help you today. You also need to be sure you can recoup all the fees before you pull the trigger.

How mortgage refinancing can affect your finances

Mortgage refinancing is the process of replacing your current home loan with one of different terms. In most cases, refinancing your mortgage will require you to find a new lender who will pay off your current mortgage. However, before you begin applying to new lenders, you need to understand your goals for refinancing and the ways a mortgage refinance may affect you, according to

While most people’s reasons for refinancing are financial in nature, the effect it will have on your finances is highly dependent on your current situation and the terms of your new home loan. Some deals will save you money in the long run but cost you more upfront. Other refinances will put money in your pocket today but increase the cost of your home over time. And still, other deals will have other widely varying outcomes for you financially. But by understanding how mortgage refinancing works, you can foresee how any given deal may affect you or at least manage the risk of refinancing.

Some of the most common reasons you may want to refinance your mortgage are to lower your interest rate, to switch to a fixed or adjustable rate mortgage, or to pull cash out of the equity in your home.

Perhaps, the most common reason for refinancing is to lower the interest rate on your mortgage, because when all other things are equal, a lower interest rate will decrease the total cost of borrowing over the life of your loan.

When refinancing to lower your interest rate, you must also consider the closing costs, how long you intend to stay in your home, and the length of your new mortgage to understand if you will actually save in the long run.

Closing costs

Mortgage refinances, like mortgages in general, are expensive. Their cost comes not just from interest charges but from closing costs, or expenses on top of the price of your home such as origination fees (i.e. a fee your lender charges to create the loan), appraisal fees, title fees, credit reporting fees, and much more.

Closing costs come in two ways: those that are part of your finance charge and those that are not. You will need to ask your lender to determine which closing costs fall into which category, but understanding the difference will help you figure out how much your mortgage will actually cost.


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