Refinancing is a way to readjust the repayment terms of your current debt obligation with a new set of terms. Your current mortgage will have a particular rate of interest and time frame for repayment, both of which can be changed through refinancing. Typically, people go for refinancing to get a reduced rate or an extended tenure, or both.
Since the present lending rates are at a record low, many people are opting to replace their existing mortgage agreement with a new one to avail better repayment terms. This may seem like a good option because of the tempting offers being advertised, but you should carefully assess whether you actually stand to benefit from refinancing. A lower interest rate alone should not be the basis of your decision.
The most important factor that you need to consider is that when you make a prepayment on your existing mortgage, you will have to pay a stiff penalty. This along with other charges for taking out the new mortgage like processing fees, closing costs, and appraisal fees should all be taken into account. Based on all these factors, find out whether refinancing actually works out cheaper as compared to your existing mortgage.
It also helps if you understand what your present financial situation is and whether it is likely to change in the near future. Ask yourself how long you intend to stay in your current residence. If you are not likely to move out in the near future, you can go for refinancing to take advantage of a lower rate. However, if you are planning to move out within a few years and are likely to sell the house, the negotiated rate has to be significantly lower to cover all the costs involved in a refinancing deal.
Similarly you should also think about how old your mortgage is and how many years of payments are remaining. If your mortgage has just 2-3 years left, it might not be a long enough period for you to gain enough benefit from refinancing.
Another situation where refinancing can be very helpful is when you want to increase your monthly cash flow by lowering your mortgage payments and extending the tenure of the loan. A lot of people resort to this option when they need to pay off high interest debts like credit card or personal loan payments.
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