If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

‘What are the implications of refinancing the mortgage on my house?’ This is a question fraught with complexities that almost every homeowner is faced with at some time or the other. If that is your question too, then here are some pointers which will stand you in good stead.

If your current mortgage is an adjustable rate mortgage (ARM) and the fixed interest mortgage rate is less than your ARM rate, then you should certainly refinance your house! Paying a steady interest will be beneficial in those times when the interest rate goes up. Another reason to refinance your house is to get a mortgage with a cash component which you can use to meet imminent payments.

Look at the market rates. Is your current rate above the going market rate? Yes? Then go in for refinancing. Remember that you have to pay a special fee when you close the mortgage earlier than planned. You’ll have to offset this amount when you compute the savings you’ll make with the lower rate loan.

One situation where refinancing is inadvisable is when you are not sure of staying in that house for the next few years. You will have to pay the pre-payment penalty when you refinance. Given a moderate interest differential, it will take you maybe three years to break even. If you have to move before reaching the break even point, the balance will add to the second pre-payment penalty when you move, and there will be no way of recovering that.

If you want to pay up the mortgage earlier than agreed upon, you have to pay a penalty, often called a pre-payment penalty. The usual amount of the penalty varies from two years’ interest right up to five years’ interest. Factor these figures in when deciding about refinancing your loan. That very profitable proposition may actually turn out to be a losing proposition in the end!

If you are going to stay in that house for a long time, and if the fresh interest rate is less than the one you are currently paying, then refinancing is a good idea. The savings in interest will give you a nice nest egg when the mortgage is finally over!

What is the amount of the refinance? Most probably it’s going to be higher than your current loan. So your repayment bill will also go up. If the new loan has a significantly lower rate of interest, then the increased repayment bill may be partially or completely offset by the savings in interest. Check that your new repayment amount is within your means.

You can earn a hefty saving by refinancing your house provided you time it right, which is when the interest rates are low. Just make sure of two things: that you can handle the payments comfortably, and that the mortgager is trustworthy.