Many people believe that refinancing a mortgage is the right thing to do whenever the rates are low. However, this certainly should not be the sole criteria here since there are a lot of other essential points to take into consideration as well.
Here it is pertinent to note that deciding precisely when to refinance your home loan will typically depend on a variety of factors apart from the premise of a better mortgage rate. You will have to try and figure out your financial requirements before you make such a decision. For example:
You may use the refinance option to cash out on your equity and go on a spending spree. Alternately, you can use this option to shore up your annual budget. From a financial security viewpoint, the former may not be a prudent choice when compared to the latter.
You can also use this option to renovate your home to increase the curb value of your home. Ultimately, it will all depend on your priorities.
Generally speaking, refinancing your mortgage will save you money even as it helps you build equity. Add to that the fact that you will be able to pay off your original mortgage a whole lot faster.
Let us check out the critical steps to deciding if it is worth your while to refinance your mortgage:
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You Have to Know and Understand Your Refinancing Goals
Before you decide to refinance your mortgage, it is critically important to know precisely what you intend to get out of this whole process. For instance, your objective may be to reduce the hefty size of your monthly repayments to a more manageable amount, or you might be interested in paying off your loans more quickly.
If these are your objectives, you will need to look for certain essential features regarding your refinance options, such as very low-interest rate loans, or loans that will allow you to make extra repayments.
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Find Out All the Required Information Beforehand
Once you have understood your core motivation for refinancing your mortgage, it will be time to start preparing to begin the process of finding the right option. In order to do this, you will need to understand all the relevant information regarding your current loan. This is one of the single best possible ways to help you determine precisely what you require from your new loan. Moreover, it will also help you to figure out the total potential amount of money you would be able to save by exercising the refinancing option.
In this case, you should gather the following information:
- Your current interest rate
- The total outstanding loan amount (including principal and interest combined)
- The remainder of the loan term and lastly
- The current market value of your property
Once you understand your current position, you will always know which lenders are offering the most competitive deal in lieu of your existing loan.
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Compare All of the Alternatives
Once have the relevant background information covered, you should start comparing all of the available alternatives viz-a-viz your current loan. Check them online and make a shortlist. After that, you should visit the offices of the ones you have marked to see which one gives you the best possible terms.
When you are comparing different loans, you must keep specific points in mind, such as the time required to repay the loaned amount after switching to this alternative. Apart from that, you should also calculate the amount you will be saving every month. After all, if the savings are negligible, it might not be worth the effort to refinance your mortgage.
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Evaluate Your Switching Costs
Once you have decided on any particular loan product, you will have to understand the cost of switching before you do the needful. Sometimes, loans come attached with hefty discharge fees that might make the change uneconomical in the long run. Apart from that, you might have to pay a fee in case of a fixed loan. Such fees are applicable when you decide to end the fixed period earlier than stipulated in the contract.
You will have to check for upfront fees and costs as well when applying for the new loan. Some of the more common expenses include different kinds of application, as well as settlement fees that will be automatically be applied whenever you set up the loan. It is always a really great idea to thoroughly read the product disclosure statement (PDS) of the mortgage plan you like. This way, you will always be in a much better position to identify any hidden fees and costs that might be associated with your new mortgage plan.
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Calculate Your Break-even Point
Once you have decided which financial product you like and also have a working knowledge of the switching costs involved, you will have to calculate your break-even point. This point may be defined as the time frame involved after which you will start deriving the benefits of your refinancing decision.
You can use any number of online mortgage calculators to estimate the cost and monthly payments after switching. Apart from that, you can also figure out the break-even point by using a mortgage calculator to estimate your monthly repayment schedule. This way, you will ascertain the difference between the two.
Example
Mr. John Smith owes $400,000 with an interest rate of 4.5%. The entire loan term is of 25 years. He decides to refinance to a 4% interest rate so that he would be able to reduce his monthly repayments. Once he finds a loan, he likes he will check the total switching cost and find out that the entire cost would be around $600.
His current monthly repayment is $2,223 while the new loan would be in the region of $2,111. The difference between the two amounts is $112. After dividing the switching costs involved, he realized he would reach his break-even point within five months max. After that, he would be able to accrue the benefits of this switch.
Conclusion
Now that you know how to make an informed decision, it is time to ask a finance or mortgage broker to help you find the very best financial products for your specific house refinance needs.
