The easiest way to describe refinancing your mortgage is that you are paying off your current mortgage “account” and obtaining a new mortgage “account”, typically at a lower interest rate. This will usually mean that as the interest rate charged on your mortgage is lower, then your monthly mortgage payments should also be lower. Therefore, in principle this sounds a great thing to do, although you should be aware that refinancing your mortgage loan to a lower interest rate may not always be the right decision for you. In fact, many homeowners choose to refinance on a regular basis, but are unaware that they probably aren’t receiving a huge financial benefit each time they choose to do this.
One thing that you should be aware of is that “paying off” or “closing” your current mortgage account will typically incur certain closing costs, which may actually negate the financial benefit you would normally receive for refinancing a mortgage loan. A prime example of this may be that you have been offered a new mortgage interest rate that will save you $200 a year over the next 5 years when compared to your current mortgage account. Sounds good in principle, but what if the closing costs of your current mortgage account is somewhere in the region of $1500.
Most people would even consider adding these closing costs to their current mortgage, thus actually increasing the amount of money they have borrowed. However, due to their new, lower interest rate they still manage to save up to $200 a year in mortgage payments, but in reality the saving has been lost because of the closing costs that have been added to the mortgage. So, the moral of the story is that you should look at the whole picture before deciding whether refinancing your mortgage is the best option for you.
Decide What Your Ultimate Goal Is First
Prior to deciding whether refinancing your mortgage is the best option for you it makes a lot of sense to determine exactly what it is you’re looking to accomplish. Even though you are officially “paying off” a mortgage account, you are in actual fact just restructuring your loan usually with a different interest rate or different term. The main reasons you may wish to refinance are:
- Reducing either the amount of interest you pay by reducing the term of the mortgage or finding a lower interest rate on offer in the market.
- Extending the term of the mortgage, thus making your monthly mortgage payments less than before, although this will typically increase the overall amount of interest you will need to pay over the entire term of your mortgage.
- Many people choose to take out a debt consolidation mortgage, which in effect is another form of refinancing, but also allows you to consolidate other debts into your main mortgage, which should hopefully decrease your monthly outgoings and allow you repay your debts with far more ease.
These are the main reasons that people look to refinance their mortgage and generally this will mean that they have a lower interest rate and a lower monthly payment, but it is still advisable to look at the whole picture before deciding if this is the right option for you.
Nancy Baker is a freelance blogger who shares her financial research and knowledge for her client, Benson Mortgages, a firm that offers effective mortgage rates in Toronto. She enjoys sharing her ideas regarding trade and finance via blogging.