Mortgage Refinancing
Once you get a mortgage and move into a home, you shouldn’t stop evaluating mortgages. Few people stick with the same mortgage over the entire term of their home ownership. Interest rates, amortization terms, and one’s personal financial condition are always changing. It makes sense to change your mortgage to your best advantage whenever conditions are right to do so. But you have to look carefully at the terms of an offered mortgage refinance deal to make sure it really is good for you.
It is not a good idea to refinance a mortgage late in its term. That’s when most of your monthly payment is going toward reducing the principal owed on the loan, and you have built up a great deal of equity in your home. (“Equity” basically means how much of the home you actually own as opposed to owing money on.) Refinancing starts the amortization process all over again, with most of your payment going towards interest and you with very little equity. That’s not where you want to be.
Your current mortgage loan agreement may contain a prepayment penalty that makes refinancing less attractive. Your current lender does not want you to pay off your mortgage early and refinance at a lower cost or with another lender. So a prepayment penalty is included to discourage you. Prepayment penalties are things you should look at closely before entering into a mortgage agreement.
If your credit rating has improved since you entered into your current mortgage, you may now qualify for a lower interest rate if you refinance. On the other hand, it’s not a good time to refinance if your credit has taken a hit lately.
Lenders take extra profits by charging fees every time you borrow money from them. It’s not unusual for these fees to be 2-3 percent of the amount borrowed. That extra cost may offset the benefit of a lower interest rate and make refinancing a bad idea.
If home prices have fallen since you assumed your current mortgage, the value of your home may be less than what you owe on it. In that case, lenders are unlikely to pay off your existing mortgage and accept a home of less value than they lent you as collateral on a new mortgage. You won’t be able to refinance.
Mortgage refinancing is a complicated, ongoing game that home buyers play, much like mowing the lawn.