March 29, 2024

Jocuri

Mad about real estate

Steps to Refinancing a Mortgage

A cheerful voice over the phone informs you of this great plan they have to refinance the mortgage on your house. Before you go ahead and say “Yes”, take a few minutes to read these important things you should consider before refinancing your house. One of the first steps to refinancing a mortgage is to decide if it will be beneficial. That’s what we’ll look at here.

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 breakeven, the balance will add to the second pre-payment penalty when you move, and there will be no way of recovering that.

The pre-payment penalty may range from one year’s interest to five years’ interest. That is no small amount! So be very careful to plan your refinancing only after determining the exact quantum you’ll have to pay as penalty.

If you are going to stay in that house for a long time, and if the fresh interest rate is less than the one you are currently paying, then refinancing is a good idea. The savings in interest will give you a nice nest egg when the mortgage is finally over!

If you are taking a top-up mortgage, that is taking a fresh mortgage to clear off the current one plus a cash component over and above that, you must expect to pay a bigger instalment. Check what this is going to be and make sure that you can handle the payments comfortably.

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.