Getting the Facts on Refinancing Your Mortgage
by Ellise Walsh

Today it is possible to obtain a much lower interest rate than originally available on mortgages and homeowners are taking advantage of this opportunity to refinance their homes and cash in on some significant savings. The process of re-mortgaging your home basically involves paying off the old mortgage by acquiring a new mortgage.

The benefits of obtaining a re-mortgage are multiple, however many homeowners are finding the time is right for them to seek refinancing due to the following reasons.

1. Interest rates are now lower than they have been in the past. In most cases, homeowners can obtain a lower interest rate on the re-mortgage, which equates to being able to save money on their monthly mortgage payment or in some cases pay off the mortgage much sooner, sometimes even years sooner than they originally planned. This can be very beneficial for individuals who are looking at early retirement or the cost of education for children.

2. Individuals who would like to consolidate monthly debts also find obtaining a re-mortgage on their home can be very advantageous.

3. A final added benefit of obtaining a re-mortgage is the ability to raise necessary finances for a variety of expenses. Most commonly, homeowners are obtaining a re-mortgage on their home in order to purchase a car, make necessary and desired home improvements, finance a child’s education or go on holiday.

When considering a re-mortgage, however there are a couple of points for homeowners to keep in mind to insure they are getting the best deal possible.

Homeowners who are considering a re-mortgage should review their first mortgage to insure there is no penalty for paying off the loan early. If there is, the penalty may outweigh the benefits that would be gained by obtaining a re-mortgage with a lower interest rate.

The home refinancing market right now is extremely competitive, which means it is possible for a homeowner to obtain a much lower interest rate than they have on the current mortgage. This may mean they will need to do some shopping around.

Just as there were fees involved with the first mortgage, there will also be fees involved with the second mortgage. In some cases, an attractive low interest rate may only hide unattractive origination and closing fees. The homeowner should always take the fees into consideration and balance them against the savings costs of the lower interest rate. Some lenders advertise ‘no out of pocket fee’ re-mortgages, but homeowners should thoroughly research these claims before signing the final paperwork. In most cases, these claims simply mean the fees are being financed in with the cost of the mortgage. This raises the principal amount of the loan and in the end, the homeowner is paying interest every month on the loan original fees and the closing costs. Over a period of a 15 or 30 year loan, this can add up to a significant amount of money.

While extremely low interest rates are often advertised for re-mortgages, in order to qualify for these rates, homeowners may need to possess perfect or near perfect credit scores. This is not to say it is impossible to obtain a re-mortgage with a bad credit score, but the interest rates will often times be higher than those quoted in re-mortgage promotions.

The homeowner should also take into consideration what type of loan is being offered with the re-mortgage. Variable rate loans are quite popular and are advertised with very low interest rates, however homeowners should be aware of the potential for disaster with a variable rate loan, especially if their original mortgage carried a fixed rate loan. With a variable rate loan, the interest rate usually increases and decreases from one month to another. These fluctuations, subsequently, cause changes in the homeowner’s mortgage payments. When the prime interest rate is low, the homeowner will find they are saving each month on their re-mortgage versus their old mortgage. When the prime interest rate rises, however, the homeowner may find they are paying more money on the re-mortgage than they paid on the first mortgage. A variable interest rate, even with a low advertised, introductory interest rate, can be a gamble.

Finally, the homeowner should make sure there are no tie-in’s required in order to obtain a low interest rate on a re-mortgage. This would include requirements that force the homeowner to purchase insurance through the lender, generally at prices higher than could be obtained elsewhere.

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