On The Question of Refinancing A Mortgage On Your House

September 22, 2009 | Filed Under Money

by Ned Dagostino

A cheerful voice over the phone informs you of this great plan they have to refinance the mortgage on your house. Before you go ahead and say “Yes”, take a few minutes to read these important things you should consider before refinancing your home.

Analyze the current status. Is the loan an ARM (adjustable rate mortgage)? Do you have to make a major payment in the near future? If your current mortgage is an ARM then it is better that you refinance using a low interest rate fixed rate loan. That way you’ll end up paying an steady interest even when rates move north. If you are facing an imminent payment situation then again you should go in for a suitable refinance deal.

Taking advantage of lower interest rates is good sense. But be warned that the fat savings you anticipate may shrink to Size Zero! Your mortgage company will ask you to pay a penalty (pre-payment penalty) for prematurely terminating the mortgage. Bearing this in mind, re-compute your savings on interest. Maybe refinancing won’t be worthwhile after all!

One situation where refinancing is inadvisable is when you are not sure of staying in that house for the next few years. You will have to pay the pre-payment penalty when you refinance. Given a moderate interest differential, it will take you maybe three years to break even. If you have to move before reaching the break even point, the balance will add to the second pre-payment penalty when you move, and there will be no way of recovering that.

The pre-payment penalty may range from one year’s interest to five years’ interest. That is no small amount! So be very careful to plan your refinancing only after determining the exact quantum you’ll have to pay as penalty.

If you are going to stay in that house for a long time, and if the fresh interest rate is less than the one you are currently paying, then refinancing is a good idea. The savings in interest will give you a nice nest egg when the mortgage is finally over!

If you are taking a top-up mortgage, that is taking a fresh mortgage to clear off the current one plus a cash component over and above that, you must expect to pay a bigger installment. Check what this is going to be and make sure that you can handle the payments comfortably.

Refinancing your home at the right time will give you a positive cash advantage. At the wrong time, you’ll be at a loss. Consult a mortgage expert familiar with your locality to get the proper bottom line on refinancing. If you see an advantage in getting your house refinanced then do so, but just make sure the lender is reputable.

About the Author:

There are several ways to get money in your wallet or lower your payment by using your house. Find out how methods like second mortgage refinancing or even a house equity refinance can help ease your financial burden by visiting www.house-mortgage-refinancing-loan.com.

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