Seven Facts to Know About Mortgage Refinancing

Refinancing your mortgage is common practice nowadays because of low interest rates and the receptiveness of borrowers toward the idea of refinancing. Although many have vouched for its benefits, house owners should evaluate their personal preferences, financial standing and current mortgage status and compare these with the various options available before planning their next move.

Here are seven facts on mortgage refinancing

1. Penalty Costs
The process of refinancing basically means paying off your current
mortgage and obtaining another mortgage at a different interest rate
(usually at an adjustable rate) and loan term. In some cases, penalty costs may be imposed on your current mortgage by your current lender, as you have opted to pay off your loan earlier than agreed upon. Occasionally, depending on the status of your current loan, penalties incurred may be higher than the cost savings obtained from refinancing your mortgage, therefore making the idea of refinancing no longer attractive.

2. Savings on monthly repayments
When you refinance your mortgage, you may most likely switch to a new mortgage structure that will benefit you in the long run, especially with lower monthly repayments. With the availability of adjustable rate mortgages, interests incurred are relatively lower than the traditional fixed rate mortgages, which have been incentive enough for homeowners to switch their mortgage loan plans. Although interest rates may seem to be lower at first glance, home buyers should practice due diligence in tabulating the actual amounts paid over the long term in comparison with their current mortgage repayments.

3. Transactions costs
As with any mortgage transaction, a refinancing exercise will involve
transaction costs such as attorney fees, points, appraisal fees,
inspection fees and prepayment penalties. All these hike up the cost of refinancing, which needs to be balanced out with the cost savings
obtained from switching loans in the first place. As a rule of thumb, if
you plan to stay in your current property for the long-term, transaction costs will be offset with savings in repayment amounts over the long run. Therefore, refinancing will then be a good option.

4. Tax deduction possible
Refinancing may help you regain tax deductions on interest if you have already used up your allocated amount for tax deductions. Therefore, with a new mortgage, you will be able to deduct interests paid from your taxable income, thus helping to reduce your taxes payable.

5. Get cash out of your equity
If you have paid most of your outstanding equity, refinancing will
be a good way for you to acquire cash out of your high value equity,
incorporating increases in the market value of your property as well.
This way, you will have the flexibility to use the extra cash for
children education, short term debt repayments or renovations.

6. Increase your home equity
On the flip side, refinancing your mortgage can also work for you if
you decide to pay more on monthly repayments and pay off your home equity within a shorter period of time. Another benefit of a shorter loan term is the cost savings gained from lesser total interests paid to the lender.

7. Alternatives to refinancing
Refinancing may not always be the only option for everyone. Other
financing products, such as a home equity line, allows you to keep your current mortgage and have the flexibility to withdraw up to a certain percentage of the current value of your home equity minus the unpaid portion of your equity. Interests are only charged on the amount withdrawn and not on the approved line of credit. Another option would be to take up a second mortgage, which will be based on a shorter loan term, but with higher interest rates.

Source: Bernice Wilson, Extension Urban Specialist, Resource Management (256) 372-4969.

Posted by dreynold at February 9, 2007 11:58 AM | TrackBack