Mortgage refinancing means repaying an existing loan and replacing it with a new one. There are many reasons why homeowners refinance: for a lower interest rate; shorten the mortgage period; for conversion from a variable rate mortgage into a fixed rate mortgage, or vice versa; use equity to raise funds in the event of a financial situation, to finance a large purchase or to consolidate debt. When can I finance my house?
Refinancing to secure a lower interest rate
One of the best reasons for refinancing is to lower the interest rate on an existing loan. Historically, the rule is that refinancing is a good idea if you can lower your interest rate by at least 2%. However, many lenders claim that 1% savings is a sufficient incentive for refinancing.
Refinancing to shorten the loan period
When interest rates fall, homeowners sometimes have the option of refinancing an existing loan into another loan that has a much shorter duration without major changes in monthly payments. For a 30-year fixed-rate mortgage for a house with a value of USD 100,000, refinancing from 9% to 5.5% can reduce this period in half to 15 years with a small change in monthly payment from USD 804.62 to 817.08 USD. However, if you already have 5.5% for 30 years (USD 568), getting a 3.5% mortgage for 15 years will increase your payment to USD 715.
Refinancing rules for withdrawals
If you’re going to withdraw cash, you’ll usually have to wait six months before refinancing, regardless of the type of loan you have.
In addition, refinancing withdrawals usually requires leaving at least 20% of equity in the home.
Therefore, before you can use the withdrawal request, you must ensure that you have accumulated enough capital to make it worth it.
Equity refinancing or debt consolidation
Although all the reasons for refinancing mentioned above are financially justified, refinancing your mortgage can be a slippery slope towards endless debt.
Homeowners often gain access to equity to cover major expenses, such as the costs of remodeling a home or educating a child in college. Homeowners can justify refinancing by the fact that remodeling adds value to the home, or that mortgage rates are lower than those borrowed from another source.
Refinancing can be a great financial move if it reduces your mortgage payment, shortens your loan term, or helps you build capital faster. With careful use it can also be a valuable tool for debt control. Before refinancing, look carefully at your financial situation and ask yourself: how long do I intend to live at home? How much money will I save on refinancing?