Mortgage Refinancing: Is It For You?

In the current economic climate, many homeowners are searching for ways to save money, and one way that has become popular, is to take advantage of mortgage refinancing. Refinancing is essentially replacing a current loan agreement and its related interest rates with a different loan. If entered into properly, this process can allow one to obtain a lower interest rate, alter your mortgage repayment period, switch your fixed mortgage rate to a flexible mortgage rate (or visa versa), and effectively consolidate debt. However, refinancing should not be entered into without a cautious examination of its costs and benefits.

The homeowner that aims to embark on mortgage refinancing must truly examines his or her reasons behind doing so. One possible benefit of mortgage refinancing is to obtain a lower interest rate than the interest rate on ones existing loan. Lowering the interest rate on a mortgage has the effect of lowering monthly payments and speeds up the rate one can build equity. In fact, homeowners that refinance their mortgages often do so to access the equity in their home, which may be done for a variety of reasons. A typical reason for accessing the equity in ones home is to pay for house remodeling, which can add value to the home. However, homeowners need to carefully consider whether extending the number of years they have to pay interest (albeit at a lower rate than could be found in another lending agreement) is worth the value added on the remodeling process.

One of the cautions homeowners should pay heed to is the danger of playing with debt, and how easy it is to rack up an unnecessary amount. Consolidating debt can be a beneficial outcome of mortgage refinancing, but that is not necessarily always the case. The decision to refinance in order to consolidate debt is backed by the logic that mortgage loans offer a lower interest rate, and thus consolidating all of your other higher interest debt in your mortgage is a smart financial move. If a household has a history of sound financial decisions, namely consistent payment on other high interest debts (such as credit cards), the benefits of consolidating ones debt in a mortgage will most likely be realized. However, the reality is that the majority of households have a history of mismanaging existing high interest debt and are likely to continue these habits even after consolidation. The credit that is freed up after consolidating ones debt in a lower interest mortgage is likely to simply be used to wrack up more high interest debt, and thus the cycle of debt is perpetuated.

Given the state of the global economy, the American economy in particular, the decision to undergo mortgage refinancing should be considered carefully. The mortgage rates are particularly low currently, but this does not mean one should jump into mortgage refinancing. A homeowner should consider mortgage refinancing only if they are staying in their home for a minimum of five years longer. This is because the cost associated with mortgage refinancing is generally three to six percent of the principal loan as well as the costs associated with refinancing applications, which could take a minimum of four years to recoup.

Before undergoing mortgage refinancing it is imperative to know your credit rating, any and all outstanding loans, and the amount owed on these debts. The benefits of refinancing as outlined above will only be realized if financial habits are consistently sound, and the decision should be undertaken with great caution and foresight.

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Posted in: Mortgage,Refinancing