Refinancing: Should you or should you not?

Banks are currently offering attractive rates to entice new customers. Is it time to change lenders?

Refinancing is the process of replacing an existing mortgage with a new loan. Typically, people refinance their mortgage in order to reduce their monthly payments, lower their interest rate, or change their loan program from an adjustable rate mortgage to a fixed-rate mortgage. Additionally, some people need access to cash in order to fund home renovation projects or paying off various debts and will leverage the equity in their house to obtain a cash-out refinance.

Regardless of your goal, the actual process of refinancing works much in the same way as when you applied for your first mortgage: you’ll need to take the time to research your loan options, collect the right financial documents and submit a mortgage refinancing application before you can be approved.

Benefits of a Home Refinance

There are several reasons to refinance your mortgage. Some of the potential advantages include:

Lowering your monthly payment. With a lower monthly payment, you are free to put the savings toward other debts and other expenditures or apply that savings towards your monthly mortgage payment and pay off your loan sooner.

Reducing the length of your loan. For homeowners who took out a mortgage in the early stages of their career, a 30-year mortgage may have made the most financial sense. But for those who want to pay off their mortgage sooner, reducing the loan term can be an attractive option.

Switching from a variable rate mortgage to a fixed-rate loan. When you have a variable-rate mortgage, your payment can move up or down as interest rates change. Switching to a fixed-rate loan with reliable and stable monthly payments can give homeowners the security of knowing that their payment will never change for the term selected.

Using the equity in your home to take out cash. Depending upon the value of your house you may have enough equity to take out cash. This money can be used to finance home improvements, pay off debts or to fund large purchases.

Risks of Loan Refinancing

Depending on your goals and financial situation, refinancing may not always be your best option. While refinancing offers a lot of benefits, you’ll also have to weigh the risks.

For example, refinancing your mortgage usually restarts the amortisation process. So, if you are five years into paying on a 30-year loan and you decide to take out a new 30-year mortgage, you’ll be making mortgage payments for 35 years. For some homeowners this is a good plan, but if you’re already, say, 10 or 20 years into your mortgage then the lifetime interest may not be worth the extra costs. In these instances, homeowners may re-finance into a shorter-term loan that won’t extend the time they will make mortgage payments, such as a 20- or 15-year mortgage.

Generally, refinancing is a good option if the new interest rate is lower than the interest rate on your current mortgage, and the total savings amount outweighs the cost to refinance.

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