Mortgage Tips

Refinancing is a great option to get rid of an existing loan and switching to a new loan with better terms. When you go for refinancing, your property is used as collateral for the new loan and the funds generated are used to repay your old debts, which, along with a mortgage, could be credit card debts and other personal debts. If you get a good refinancing deal, you can significantly reduce your monthly payments on your debts.

The most obvious advantage of refinancing is lower interest rates. Over the past two years, several lending institutions have slashed their interest rates making refinancing more affordable, thus allowing you to get rid of your high interest rate debts. A longer maturity period can give you more time to repay the mortgage and further reduce your monthly payments.

Cash Out Refinancing

You can also generate cash by refinancing your mortgage. This kind of refinancing, in which the principal amount on the refinance loan exceeds the previous loan, is known as cash out refinancing. The surplus can be used to repay high interest debts. Or you can consolidate your debts by clubbing them together under a single low interest loan. In fact, you can use the surplus cash for any purpose, like renovating your home or buying a new vehicle. However, you need to own some equity in your home to avail cash out refinancing, or the value of your house should have grown significantly since you took the existing mortgage.

Read the Fine Print of Your Existing Mortgage Contract

Many people do not read the fine print of their existing mortgage contract and find out that they have to pay for closure fees and prepayment penalties. Lending institutions are required to disclose closing costs within three days of receiving a loan application. However, these costs are only estimates until the details of the loan are finalized. So always go through the terms of your mortgage before you decide to close it.

Understand the Terms of the New Loan

When you go for refinancing with a longer loan term than your existing mortgage, your monthly payments will go down but you should not forget that over the whole term of the loan you might end up paying more interest. This might make sense if you are facing financial difficulties right now, but otherwise the total cost may outweigh the benefits.

Similarly, if your new loan has an adjustable interest rate, then your monthly payments in the near future might be lower, but the rate could dramatically increase in some time. In that case your monthly payments with also go up. Locking in a fixed rate of interest will ensure that your payments are evenly distributed over the tenure of the loan.

It helps to do a little homework and calculate how much a new loan can actually help your cash flow. Do not be misled by marginally better rates, which may hide many unnecessary charges. Read the offer documents carefully and make sure you understand the significance of the terms listed in them.