Refinancing the Mortgage

When refinancing a mortgage, you essentially pay off one mortgage and take out another. Why do that? There are several possible reasons. While most of these may end up benefiting, you have to weigh the costs as well. Generally refinancing will cost about 5% of the mortgage value.

By refinancing you may be able to get a lower interest rate than the previous mortgage thus lowering your monthly mortgage payment. This is usually recommended if the interest rate goes down by 2 percent or more. In other cases you should weigh the numbers to see whether there will be any real benefit.

You may also want to change the time period of the mortgage to one better suited to your present circumstances and present economic conditions. For instance if there is a lower interest rate you can shorten the period with hardly any change in monthly payment.

Exchanging the mortgage from an adjustable rate or ARM mortgage to a fixed rate mortgage, or to do the converse, may also be a motive for refinancing. Benefits will depend on whether interest rates are expected to go up or go down.

Other motives can include getting full access to the equity of the real estate or to consolidation of debts. If you want to finance a big expense it may be beneficial for you to tap the equity by refinancing. Mortgage payments are also tax deductible thus increasing the attractiveness of this method of financing. However be careful, you are basically using debt backed by your home. So make sure that the purchase or expense is really worthwhile.

If your motive is consolidation of debt, basically paying off high interest rate debt such as credit card debt by using lower interest mortgage loan, then make sure that you do not accumulate credit card debt again. Otherwise the point of the whole exercise will be lost.

To conclude, you should have a clear idea about your motives, and cost and benefits, before refining your mortgage.