Buying a place that you can call home is the best thing you can do with your money. It is an asset that can protect you and your family during difficult times. Besides, it also has an emotional value. Those walls can safely preserve the fond memories of your family and remind you of all the good times spent there.
However, buying a house often comes with sacrifices. You may have to get a mortgage and compromise on your lifestyle. The real trouble begins when it starts messing with your monthly expenses. If you are in a similar situation, you may consider mortgage refinancing.
What is mortgage refinancing?
In simple terms, mortgage refinancing replacing your current mortgage loan with a new one. Generally, home loans are customizable, and you can select the loan tenure and the nature of your interest rate. The terms may have seemed favorable when you took the loan but the situation may change. For instance, fixed interest rates can get lower. In other cases, your financial obligations could increase due to an emergency in the family.
In such situations, you can transfer your loan to another bank, and avail better loan terms. The new lender pays off your previous loan in this case.
What are the benefits of mortgage refinancing?
The main advantage of mortgage refinancing is that it can save you more money in the long term. Let’s look at how it can achieve that.
- Lower interest rate – You must consider switching your lender if the offered interest rate is significantly lower than what you are paying currently. This will reduce your monthly outgo, and you will have more disposable income to spend on your necessities. Secondly, a high interest-rate will accumulate over the years and compound to increase your liability. Thus, your overall debt will also reduce with refinancing.
- Shorter tenure – You can consider this option if you can afford to pay higher monthly installments. A shorter tenure means you will pay interest for fewer years. Although it may increase your monthly outgo, the total repayment will be much lesser.
- Changing the nature of interest rate – There are two kinds of interest rates – fixed and adjustable rate. You could have chosen an adjustable-rate mortgage when you bought your home. However, adjustable-rates usually increase with time. If you think there is a considerable difference between the two, you must consider switching. Conversely, if you have a high fixed rate, you can consider opting for an adjustable-rate. This is advisable only if you do not intend to stay in your house for long. You can enjoy lower monthly repayments without worrying about future rates.
- Debt consolidation – You may consider consolidating your high-interest rate loans if you are under too much debt. However, it is suggested to go ahead with the plan only if you have a solid plan for your future. It is suggested to be more careful with your expenses in the future and perhaps change your lifestyle to avoid a similar situation again.
Tips for mortgage refinancing to save money
Mortgage refinancing, in itself, is not going to save you money. You need to be careful about a few things before you decide to go ahead with it.
- Find out from your current lender if there are any prepayment penalties. If they do, it is a good idea to work out the numbers to make the right call.
- Similarly, you must check the closing costs. In certain cases, the closing costs may be exorbitant. In that case, it may not make any sense to change your lender.
- Most new lenders will give you a grace period during which you will not have to pay any installment. Try to save that money for essential expenses such as clearing your credit card debt. This strategy will ensure that you save money in the long run.
- Certain homeowners take cash-out to pay for their children’s education or to account for home improvement. If possible, try to avoid this as you could be exposing yourself to more risk.
As seen above, mortgage refinancing has several benefits. However, the key is in understanding if will truly serve its purpose. The best thing is to work out the numbers before taking the plunge.