When Mortgage Refinancing is a Good IdeaRefinancing a mortgage is simply taking out a new mortgage. It means
paying off one or more old debts by getting a new loan. Sometimes,
refinancing your mortgage can really save you money. You may be able
to pay less interest, lower your monthly payment, or convert from a
30-year loan to a 15-year loan and build your equity faster. But be
sure that refinancing is right for you.
1. Refinancing can be a good idea for you if you:
– want to get out of a high interest rate loan to take advantage
of lower rates. This is a good idea only if you intend to stay in
the house long enough to make the additional fees worthwhile.
– have an adjustable-rate mortgage and want a fixed-rate loan to
have the certainty of knowing exactly what the mortgage payment will
be for the life of the loan.
– want to convert to an adjustable-rate mortgage with a lower
interest rate or more protective features.
– want to build up equity more quickly by converting to a loan
with a shorter term.
– want to draw on the equity built up in your house to get cash
for a major purchase or for your children’s education.
2. Some situations where refinancing your mortgage can really save
– refinancing your higher interest rate unsecured loans with
lower interest rate unsecured loans if the terms of the loans are
comparable and the new rate is lower than the existing rate.
– refinancing your secured debts (such as your mortgage or car
loan) if the new loan is for the same length of time left on your
old loan (or shorter), and the interest rate on the new loan is
substantially lower than the interest rate on your existing loan.
– refinancing your home to pay-off expensive car loans or credit
cards provided you’re not in financial difficulty and not at risk of
losing your home.
Mortgage refinancing can be worthwhile, but it does not make good
financial sense for every homeowner. A general role of thumb is that
refinancing becomes worth your while if the current interest rate on
your mortgage is at least 2 percentage points higher than the
prevailing market rate. This figure is generally accepted as the
safe margin when balancing the costs of refinancing a mortgage
against the savings.
Sometimes, refinancing is an appropriate way to resolve financial
problems. In some situations, however, refinancing can make existing
financial problems worse. If you decide that refinancing is not
worth the costs, ask your lender whether you may be able to obtain
all or some of the new terms you want by agreeing to a modification
of your existing loan instead of a refinancing.
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