When Mortgage Refinancing is a Good Idea

by Chileshe Mwape

Published on this site: July 28th, 2005 - See more articles from this month

Refinancing 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 you money:
   
   
   • 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.

Chileshe Mwape writes for the Mortgage Lender Guide at: http://www.lending-guide.org/ which offers informative articles about mortgages and loans. This article may be reprinted as long as all the above links are active and clickable.