While taking a home loan, the biggest fear for any borrower is the fluctuations in interest rates. There are number of different national and global uncontrollable factors that cause changes in the interest rate. It is possible to get the advantage of lower interest rates even when a person’s loan is borrowed at a higher interest rate. It is possible through refinancing the home loan and thus reducing the costs to build up savings.
Refinancing home mortgage in simple terms is taking a new loan when the interest rates are low and using it to pay off the existing higher rate loan. The payment system for monthly installments is then at the new interest rate. It is a process similar to getting a regular home loan and can prove to be money saver if done correctly and at the appropriate time. But refinancing home mortgage is not as simple as it seems. There are various risks involved with it; the biggest of all risks is that a person ends up paying more than in the original loan.
When there is a drop in interest rates, people rush to get their mortgages refinanced. But decision to refinance is not a tailgate decision and hence should not be taken by blindly following the herd. Though the low interest rates act as bait in luring borrowers, it may not make sense in every person’s financial conditions. Though the interest rates may be low, refinancing mortgage adds to the principal amount of a loan and also increases its tenure. Combining the effects of these three factors may prove a beneficial appearing refinancing option to be a pricey, expensive choice.
Along with the interest rate, there are other factors that need to be studied before deciding to refinance mortgage. They are –
• Amount of loan owed – The difference between the amount of original loan and the amount repaid already decides the principal amount for refinancing.
• Duration for which the person intends to keep the house – If a person plans to sell the house in short term, getting it refinanced does not seem a sensible decision.
• Tenure of the original loan – If a person has already completed around 75% of the original tenure, increasing the payment tenure with refinancing may not prove beneficial.
• Credit rating – A person with a bad or low credit rating faces more problems in getting their refinancing application approved compared to good or decent credit rating. People with low/ bad credit rating may also have to pay higher interest rates.
Refinancing is a smart move for great cash savings and when made with proper analysis and planning can help attain financial freedom.
