Mortgage refinancing entails repaying an old loan and replacing it with a new one. Homeowners remortgage for a variety of reasons:
- To get a lower rate of interest
- To reduce the duration of their mortgage
- To convert a variable-rate mortgage (ARM) to a fixed-rate mortgage (FRM), or vice versa.
- To borrow against your home’s equity in order to cover a financial emergency, finance a big purchase, or consolidate debt.
Because refinancing may cost between 3% and 6% of the principal on a loan and, like an initial mortgage, involves an appraisal, title search, and application fee, it’s critical for a homeowner to evaluate if refinancing is a prudent financial move.
Reduced interest rates not only help save money, but they also accelerate the pace at which you develop equity in a house and may help reduce monthly payment costs.
You can use a simple mortgage refinance calculator to figure out the logistics.
On the other hand, switching from a fixed-rate loan to an ARM — which typically has a lower monthly payment than a fixed-term mortgage — may be a prudent financial move when interest rates are dropping, particularly for homeowners who do not intend to remain in their houses for more than a few years.
These homeowners can lower their interest rate and monthly payment on their loan, but they won’t have to worry about how rates rise 30 years from now.
If interest rates continue to decrease, the periodic rate adjustments on an ARM result in lower rates and lower monthly mortgage payments, obviating the need to renew each time rates decrease. On the other hand, this would be an imprudent approach when mortgage interest rates increase.
Homeowners often borrow against their equity to pay large expenditures, such as a home renovation or a child’s college tuition. These homeowners may explain the refinancing by stating that renovation increases the value of the property or that the interest rate on the mortgage loan is lower than the interest rate on a loan from another source.
Refinancing may be an excellent financial decision if it lowers your monthly mortgage payment, shortens the duration of the loan, or accelerates the accumulation of equity. When utilized properly, it may also be an effective instrument for resolving debt. Prior to considering refinancing, carefully examine your financial position and ask: How long do I want to remain in this house? How much money would refinancing save me?