What to Look for When You Consider Mortgage Refinancing
Posted 04/24/09
In mortgage refinancing, a property owner, often someone who has a mortgage on their home, takes out a second mortgage that has better terms than the first mortgage did. In the process, the mortgage holder pays off the old mortgage, essentially replacing one loan with another. If the new mortgage's terms are chosen carefully, mortgage refinancing can be a valuable method of improving one's finances.For instance, a lower interest rate is generally a sign that a mortgage is a good investment. The interest rate is the most important variable in determining the total cost of a loan, so a lower interest rate usually adds up to considerable savings. However, if a new mortgage offers a lower monthly payment, but the interest rate is no lower than the old mortgage's interest rate, the new mortgage will have a higher total cost. This effect can be seen in mortgages that have a higher interest rate but drop the monthly payments by extending the term of the loan. This type of loan should be chosen only when the homeowner is having difficulty making higher payments at the moment, but foresees being able to pay more per month in the future.
Another detail to consider is any fees that might be added onto either the old or the new mortgage. For example, mortgages commonly have a penalty attached that levies a substantial fee if the holder pays off the loan within a certain period after taking out the loan. The penalty is intended to keep the mortgage open long enough for the bank to make a decent profit from it. Most mortgages have a penalty of this type, but it rarely poses a problem. For instance, a one year penalty period on a twenty to thirty year loan is not burdensome; the likelihood that the mortgage holders will be able to pay off the loan or will try to get mortgage refinancing within the first year is extremely low. However, if the loan is one of the few with a longer penalty period, the homeowner can effectively be prevented from getting mortgage refinancing during a period when interest rates have dropped to attractively low levels. Because paying off the mortgage within the penalty period can be pricey, there may be no savings in taking out a new mortgage.
However, if the homeowner is outside the penalty period, interest rates are low, and it is possible to get a new fixed rate mortgage, mortgage refinancing is a sound financial decision. Reading all the fine print, including the details the lender does not highlight, can lead to considerable savings. With care and attention, mortgage refinancing can be a powerful tool for increasing your financial stability and improving your financial outlook.