Refinancing The Mortgage : Pros and Cons

June 8, 2021

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What is refinance: –

Refinancing literarily means revising and replacing the terms of an existing credit agreement (Mortgage). If approved the borrower enters a new contract with revised interest rate, payment schedule, or even revised principal amount of mortgage. For all practical purpose it is a new loan, and you need to complete all formalities generally associated with obtaining a mortgage. You can get refinance from a different lender wherein your previous loan(mortgage) will be paid off and you start all together a new mortgage.

Reasons why borrowers go for refinance: –

First and foremost reason for refinancing is change in interest rates. Suppose you have taken a mortgage at a fixed rate and due to changed market dynamics the interest rates have fallen drastically. In such cases it is always better to go for refinance since you can negotiate your mortgage at lower rates and save substantially on your monthly repayment. You also have option to revise the repayment period and can increase or decrease it depending upon your current financial position.

Second reason is cash out refinance. Suppose you purchased a house one year ago for $500,000 and arranged a mortgage of $400,000 (80%). After one-year market value of your house is $600,000. If you go for refinance, you can get mortgage of $480,000(80% of current market value). Thus, you can utilise this amount for some other purpose. This is not free money because there is increase in your liabilities in future, at best you can treat it as a loan on lower interest rate which can be used to pay off your high interest rate credits like payment of credit card or other short-term loans availed at high interest rates.

Third reason though not very common is clubbing of two mortgages to make things easy. This may or may not provide any financial benefits.

Should you go for refinance? –

Before taking any decision for refinance you must work out your cost benefit analysis.

First, you should see terms of your existing mortgage whether there is any prepayment penalty if so whether it will be still beneficial to go for refinance even after paying this amount.

Secondly what are additional costs involved in refinancing your mortgage, how much reduction in monthly repayment, and how it will affect your tax liabilities and what will be your net savings.

Only after doing this cost benefit analysis, if you feel the benefits outweigh the costs, you should decide about refinancing your current mortgage.

If you are ready to refinance or have any questions, contact us and we will help you to make sure you do not regret by making a wrong decision!

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