You have probably heard of the term mortgage refinancing, but chances are you don’t know exactly what it is or how it works. If you are interested in buying real estate of any kind, or decreasing your expenses, learning about this process might benefit you greatly.
Mortgage refinancing must not be confused with a ‘top up’ loan. A loan ‘top up’ is when you increase your loan amount but remain with your current lender.
Refinancing is when you change your lenders. There can be many reasons for seeking to refinance your mortgage.
Perhaps you are not happy with your existing lender, maybe you are looking for a cheaper loan with a better loan structure, or perhaps your current lender is not ready to approve your application for an increased loan amount. If you choose to go through with this process, you will need to complete the entire loan application process and provide all the documents required by the new lender.
You will also need to employ the services of a solicitor to arrange the discharge of the current mortgage and transfer the property title to a new lender. There are also financial penalties payable to the current lender if you are on a fixed mortgage.
You must have a clear financial objective in mind before you decide to refinance your mortgage. The decision should be based on your individual financial situation.
You must decide only if it makes financial sense because it takes time, effort, and money. Go from a Floating Rate to a Fixed-Rate.
You must take into account what current rates are doing. Are they rising or falling?
If the floating or adjustable rate mortgage is much higher than the prevailing fixed interest rates then it may be a good time to consider a change. Another important thing to consider is the amount of time you plan to own your home or the investment property.
If you are only going to keep it for a few months or years then it does not make sense to refinance but continue on a floating rate as loan breaking costs can be high. If you’re planning to own the property for longer period of time then it might be advisable to refinance to a fixed-rate.
Refinancing from a fixed-rate mortgage to a floating rate depends upon the length of time you wish to own the property. It makes no financial sense to pay a higher interest rate on a 30-year fixed-rate when you wish to sell it in perhaps seven years.
You may consider keeping your loan either on floating rate or ARM or fix it for a seven year period. In case your loan is not assumable you may get stuck with a property if the breaking costs of the loan are so high that it will prohibit you from selling the property.
You can substantially lower your payments by reducing the borrowing cost by just one half to one percentage point in interest rate. If you have a large property, even minor changes in interest rates can improve your financial position by refinancing.
There are different options you can use to lower your monthly payment and improve your cash flow. Simply refinance to a lower interest rate.
A lower interest rate will lower your monthly payment. Change the term of your mortgage.
You can either increase or decrease the terms to take advantage of the most suitable prevailing rates. Refinance to an interest-only loan.
An interest-only loan with no principal repayments will improve your cash flow and give you better tax benefits. You can refinance to get a home equity loan.
You can use the money for funding home improvements, paying for your child’s education, or paying off high-interest on your credit card debt. You should do this only if you have additional cash flow to pay off the increased monthly repayments.
Paying off high interest credit card debt with loan against your property makes lot of financial sense. This can result in saving thousands of dollars in interest payments.
Apart from the high interest charged on the credit card debt, the interest paid is also not tax-deductible as in the case of property. This is why credit card debt is often referred to as “bad debt.”
On the other hand, mortgage on a property is referred to as “good debt.” It is a smart move to use your property equity, rather than your credit cards, to finance expensive purchases.
If this sounds good to you, do some research and talk to your lender today. You never know the difference it could make for you and your finances!
Jack R. Landry is a resident of Las Vegas and has written hundreds of articles relating to tourism and real estate. He recommends (http://www.Tradewind-lv.com) for your next home in Las Vegas.
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