Why refinancing can be worthwhile

Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many reasons why homeowners refinance. For example to get a lower interest rate or to shorten the term of the mortgage. You can also switch from a variable rate mortgage to a fixed rate mortgage or vice versa. Or to tap equity, raise funds for a financial emergency, finance a major purchase, or consolidate debt

Since a refinance can cost anywhere from 3% to 6% of the loan amount and – like an original mortgage – requires valuation, title research, and application fees, it is important for a homeowner to determine whether a refinance is a wise financial decision.

Lower the interest rate

One of the best reasons for one Refinancing is lowering the interest rate on your existing loan. Historically, the rule of thumb has been that refinancing is a good idea if you can cut your interest rate by at least 2%. However, many lenders say that saving 1% is enough incentive to refinance.

Lowering your interest rate will not only save you money, but will also increase the rate at which you build equity in your home, as well can reduce the amount of your monthly payment. An example: For a 30-year fixed-rate mortgage with an interest rate of 5.5% for a house worth € 100,000, the repayment and interest payment is € 568. The same loan with an interest rate of 4.1% reduces your payment to € 475.

Aim for a shorter term

When interest rates fall, homeowners sometimes have the option of refinancing an existing loan with another that has a significantly shorter term without much change in the monthly payment. Let’s take the same example again: With a 30-year fixed-rate mortgage for a house worth € 100,000, a refinancing from 9% to 5.5% can halve the term to 15 years, with the monthly rate only increasing slightly from € 804 816 € changes. However, if you’re already at 5.5% for 30 years (€ 568), a 3.5% mortgage for 15 years would raise your payment to € 714. So it’s always worth at least a look. A Credit comparison so is always helpful.

Summarized

Refinancing can be a great financial move if it will reduce your mortgage payment, shorten the life of your loan, or help you build equity faster. If used carefully, it can also be a valuable tool in bringing debt under control. Before you refinance, you should take a close look at your financial situation and ask yourself: How long do I plan to continue living in the house? How much can I save by refinancing?

Note that refinancing costs 3 to 6% of the loan amount. It takes years for these costs to be amortized by the savings made through a lower interest rate or shorter term. So, if you don’t plan on staying in your home for more than a couple of years, the cost of refinancing can negate the potential savings. It also pays to remember that a smart homeowner is always looking for ways to reduce debt, build equity, save money, and eliminate their mortgage payment.