Top Reasons to Go in for Refinancing Mortgage

Kathleen handles the PR department of a Boston based corporate house.  She and her husband Martin had recently opted for home mortgage. Martin works with the Boston state government. However, they are finding it very difficult to repay the mortgage amount, especially after taking into consideration the fact that they have to set aside a huge amount to meet their household expenses as well as the expenses of their three school going children.

Once during a conversation with her colleague, Kathleen became aware of the benefits of refinancing the mortgage.

Many times, we take mortgages to tide over our financial difficulties. At times, we might take a mortgage so that we are in a position to own our dream house. However, now and again due to financial constraints one is not able to stick to one’s commitment. Initially, we start defaulting only occasionally. But soon these occasional defaults acquire a permanent status. And then, the repayment amount spirals out of control.  Under such circumstances, refinancing the mortgage is the best option.

When you opt to refinance your mortgage, you actually take out a new loan to pay off the amount of your old mortgage. Moreover, the same asset is used to refinance the mortgage. In other words, if you have used a house to obtain the mortgage amount, then, the same house needs to be used to for refinancing the mortgage.

But many of you will doubt as to whether refinancing one’s mortgage can be termed as a smart move? What are the various advantages associated with refinancing one’s own mortgage? What are the reasons that prompt people to go in for refinancing their mortgage?

We all are aware of the fact that mortgage rates keep fluctuating. Refinancing the mortgage allows you to take advantage of falling interest rates. Take the example of Mack, who works as a librarian with a local Boston library. Two years ago, when Mack had gone for a home mortgage loan, the interest rate was hovering around the 10% mark. However, a year later, the interest rates started falling and went down as low as 6%. Mack immediately decided to refinance his mortgage. By refinancing the mortgage, Mack was able to lower the interest rate that was being charged on his home mortgage loan.

Refinancing the mortgage will also lend a fillip to your savings. Most people opt for refinancing their mortgage only when the current interest rate is significantly lower vis-à-vis the interest rate that was prevailing during the time when they had taken out a mortgage loan. Now, a decrease in the interest rate will also have an impact on the amount that is being repaid. Assume that your bank is currently levying an interest rate of 10%. You have an outstanding mortgage amount of  $ 200,000. Hence, you are required to pay an annual amount of $ 20,000. Now, if you decide to refinance your mortgage and are able to secure an interest rate of 6%, then you will be required to pay only 12,000 dollars. This will result in savings of $ 8,000 per year.

Sometimes people also opt to refinance their mortgage so that they can shorten the repayment term. Take the case of Justin who works for Boston Software Solutions. He received a 15% hike in his salary when he was promoted to the post of regional sales manager. He realized that he was in a position to repay a higher amount. Hence, he decided to refinance his mortgage so as to shorten the repayment term. A shorter repayment term meant that Justin’s monthly repayment amount was bound to increase. However, he felt that his increased salary would enable him to meet the revised target.  He also reasoned that a shorter repayment term would reduce the overall amount of interest he would have to pay on his mortgage.

Refinancing your mortgage can also get you extra cash, which can then be utilized for meeting other financial obligations. According to US laws, the amount obtained from mortgage refinancing has to be utilized for clearing off previous mortgage amounts. In other words, the amount cannot be utilized for any other purpose. However, there is no restriction whatsoever on the surplus that is left after clearing off previous mortgage amount.

Sometimes people also refinance their mortgage so as to convert from ARM [Adjusted Rate Mortgage] to FRM [Fixed Rate Mortgage]. Timothy an employee with Citibank’s Boston branch had opted for an ARM for his home mortgage loan. However, a few days later he heard a rumor about a possible hike in the interest rate by about 5%. Since, he was paying an interest at the rate of 10%, a 5% hike would have taken the interest rate to 15%. Justin knew that the FRM rate stood at 9%. Hence, he decided to refinance his mortgage so as to secure a lower rate of interest.

Thus, refinancing one’s mortgage can prove useful. However, you should weigh the benefits vis-à-vis the losses before finally refinancing your mortgage.  

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