Mortgage Refinancing: 5 Reasons Why You Should Refinance
Following the fallout from the global recession and collapse of the subprime market, many home owners were left with a dilemma: 'Should I consider mortgage refinancing or stick with my current lender?' After all, interest rates are at an all time low. The only consideration most of us have is the cost of the fees which can make switching our mortgage a difficult decision.
So, how do you evaluate your options? Read on for 5 reasons why you should be preparing to refinance your mortgage.
You Want To Lower Your Interest Rate
For most of us, this is the main reason for considering a move from our current mortgage supplier. The interest rate applied to your mortgage is a significant factor in the calculation that is used to work out your monthly payments. The price of your home is another major factor but let's leave that out of the equation, for now.
You already know that the lower the interest rate, the less money you pay back to the bank each month. Based on the current health of the market, loan interest rates change all the time. An improved credit score can also affect the level of interest that is set on your repayments. Either way, a lower rate of interest means reduced repayments for you which, in turn, will help you build up savings that can be leveraged against future remortgage applications. Using an online mortgage refinance calculator will give you a good indication of the savings you can make.
Changing The Term Of Your Mortgage
For most of us, the idea of being mortgage free before you retire is a powerful incentive for changing how you view your living arrangements.
Rather than seeing bricks and mortar as simply a place where you go after work, envisioning a home for you and your family is a great way of changing your perception of a mortgage. But how quickly you pay off your debt is subject to personal circumstances.
There are two options. First, you might want to increase the term of your mortgage. This, in theory, will reduce the amount you need to repay every month. This means you will have more money but the additional years added to the term may well increase the overall amount you pay. The second option is to reduce the term of your loan. This will likely reduce the actual interest rate you pay because you'll be placed in a lower risk category by your lender but you will also be hit with higher monthly repayments.
Moving From Adjustable-rate To Fixed Rate Mortgage
There's a lot of debate around fixed and adjustable-rate mortgages but, ultimately, you need to choose what's best for you and your finances.
The most common argument against adjustable-rate loans is that volatility in the money markets could leave you in a position where you are unable to meet your financial obligations. Not only could you lose your home but your credit rating will suffer, making it harder to get a loan in future. Fixed rate mortgages do go a long way to giving you peace of mind. By locking in your interest rates for a set period you can plan your finances more effectively. This removes any uncertainty you might have about how fluctuating rates will impact your cash flow. Also, fixed rates give a certain amount of protection from future interest rate rises. Given the precarious state of the economy right now it's easy to understand why fixing your interest rates for a set period is so appealing.
Improving Your Adjustable-rate Terms
What if you've already made the jump to an ARM? Are there any reasons why you'd want to switch?
Yes, there are a number of very compelling reasons why you'll want to jump ship. The banks are money lenders at war with each other. Those promises of a better deal aren't solely aimed at saving you money: they're intended to increase the number of customers and their profits. But this mad rush for new, long term custom has worked out well for many home owners. Many lenders are offering extremely low entry rates of interest for new customers. Adjustment and hard caps to the rates you pay are a great way of enticing customers from one lender to another. But look before you leap: check your fully indexed rate and calculate the effects of adjustments over the term of the mortgage offer.
Releasing Equity In Your Home
What is equity? It's the difference in what you owe your mortgage lender and the value of your home. The bigger the gap, the more equity you have.
Equity release schemes have been around for a long time but, over the years, some of them got a bad rap. Basically, some companies would happily help you extract all your equity from your home but, in return, you have to hand it over when you die. This was an easy way to get your hands on fast cash but left you with nothing to pass on to your friends and family.
Many of the big banks and lenders offer equity release plans that actually have a softer, more human side to them. Lenders understand that, from time to time, we all need to find a way to free up the money locked into our houses and are happy to help extract some of that dollar value. But there is one major negative point to consider; when you take out equity the gap between what you and owe and the value of your home decreases. If you decide to sell you'll have less profit to pocket.
5 simple reasons for considering refinancing your mortgage. In the next post we'll look at 5 reasons why refinance might not be the best option.
Written by James Redden
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Last update: 08 July 2013
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