5 Good-and-Bad Reasons to Refinance Mortgage

5 Good-and-Bad Reasons to Refinance Mortgage

Simply put, refinancing is paying off an existing mortgage by setting up a new one.
There can be more than one reason why one considers refinancing his/her mortgage. But refinancing doesn’t come for free. There’s a substantial cost to bear (that can be up to 6% of the principal amount), hence arises the question – when is it wise to refinance and when it’s not?

Reason 1: The rates have tumbled down

Mortgage rates have stumbled like never before and everybody in the office seems to engage in who-catches-the-fish-fastest discussions. You too are considering getting your mortgage refinanced, but here’s what you should know. Refinancing is worth only when the rate falls by 1 – 2% fall.

Anyhow, refinancing for a lower interest rate saves you substantially on monthly payment as shown below:

Mortgage Monthly Payment

20-year fixed-rate mortgage of $100,000 with an interest rate of 8% $836.44
20-year fixed-rate mortgage of $100,000 with an interest rate of 6% $659.96

Reason 2: You are looking to shorten the repayment term

When rates fall, homeowners can choose to refinance and shorten up the repayment term instead of opting for reduced monthly payments.

Mortgage Term
Fixed-rate mortgage of $100,000 with an interest rate of 8% and monthly payment of $836.44 20 Years
Fixed-rate mortgage of $100,000 with an interest rate of 5% and monthly payment of $836.44 14 Years (app.)

Reason 3: Your improved credit score gets you qualified for a lower-rate mortgage

It really is a good news that you managed to improve your credit score. But having an improved credit score doesn’t stop your new lender to assess your eligibility for the mortgage. To refinance, you need to go through the mortgage cycle all over again. The new lender will consider your mortgage application from the scratch, taking into account your credit score, your debts and assets and the value of the property. Plus, there are inspection fees, application fees, appraisal fees and pre-payment fees to incur. So make your choice wisely!

Reason 4: You want to cash-out refinance

Let us tell you what exactly ‘Cashing Out’ means. The equity that one build up in his/her home is more or less like a savings account. As a homeowner, you can borrow money against this built-up equity. ‘Cashing Out’ is this act of borrowing. One may want to borrow this money for fulfilling various financial obligations, the most prominent of which is paying off an outstanding credit-card debt. It’s like converting your high interest credit card debt into low interest mortgage debt backed by your home. Now this has both good and bad side. The good side is, by doing it, you save a hell lot of money as the interest payable on mortgage is tax-deductible. But the bad thing is that by backing the debt with your home, you put your most treasured possession at stake. So you have to choose the cash-out option with discretion.

Reason 5: You are looking to switch from floating rate to fixed rate

Mortgage rates have hit an all-time low. It seems just the right moment to refinance and switch from floating rate to fixed rate. The rates are favorable and it’s perhaps the best time to lock in to become immune to the turns and tumbles of the future. And on the same equation, switching vice-versa i.e. from fixed rate to floating rate might not be a good idea.

Believe us refinancing is no fun. We have talked to thousands of people who have refinanced and have discovered that locking horns with a new mortgage agent is quite a task, not to mention, the tedious paper work it involves.

You should know that the ‘best mortgage rate’ is not always the best for everyone. When you decide to refinance, you should do it not because everyone’s doing it, not because your neighbor said so (except of course if he happens to be your financial consultant) and definitely not because you have an instinct to do so.

A handy way to check if you win or lose by refinancing is to use mortgage calculator. It’s a simple financial tool that helps you to make a comparison between the savings and the costs involved in refinancing your mortgage. All you need to do is input your principal, interest rate, term and so forth. Make sure your refinancing doesn’t end up as a “spending 1 dollar to save 50 cents” affair.