At times, one might wonder whether a right decision has been taken with regard to availing a mortgage for a home. What appeared a good offer early on, may turn out to be not so good at some point, either because of the advent of more attractive offers or due to the inability of the borrower to cough up his EMI.
So, one needs to constantly keep a tab on new mortgage programs, interest rates, and other goodies that lenders offer.
Save on Interest Payments
Many feel that lower interest rate and reduction in EMIs are good enough reasons for getting a refinance, as this would help keep more cash in hand. Additional cash-flow help plan on home improvements and to meet any contingency. However, unless the reduction in interest rate is significantly large, it is not worth seeking to refinance. Normally, a 0.5% – 2% lower interest rate is considered fair enough reason for seeking a refinance.
Choosing Between Fixed Mortgage and Adjustable Rate Mortgage
An Adjustable Rate Mortgage may sound interesting as you expect interest rates to trend lower somewhere down the line and give you some relief with regard to your payments. But when interest rates rise, this could make a dent in your wallet. Shifting from ARM to Fixed Mortgage Rate will help when you have a steady flow of income. With the Federal Reserve hiking interest rates and hinting at more hikes going forward, it makes sense to shift to Fixed Mortgage rate.
Get Out of Debt by Opting For Lower Term
At the time of taking the first mortgage, you may have thought you would go in for a long tenure, and with the passage of time, thanks to a rise in your salary and perks, you might consider closing your debt much earlier. The shift might result in a slightly larger monthly payment, but the shorter tenure of the mortgage will help in decent savings in the long run and plan your future goals. All you have to do is rework your budget and ensure that a shift will not hurt your finances till the end.
Wriggle Out of Temporary Crisis
On the contrary, due to some emergencies or a cut in salary, meeting monthly commitments might become tough. On such a scenario, shifting to a longer duration will help resolve certain immediate issues although it would result in higher interest payments over a long-term,
Shifting the loan will make sense if the second lender offers a facility that is not currently available. For example, if the current mortgage does not allow you certain repayment options, including extra repayments, that will help clear the loan ahead of the term, then refinancing with a lender who gives you this facility helps. An extra repayment of $200 – $300 every month will result in savings on interest and help finish off your loan ahead of tenure. Also, some lenders offer a redraw facility that allows you to take out some funds for home improvement or for emergencies.
Finally, remember nothing comes free of cost, and home refinance involves a cost as well. So, figure out how much you can save by a refinance, after paying for foreclosure of the initial mortgage. If the numbers work out to your advantage, then go ahead and call your agent/advisor.
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