The Balancing Act That Is Refinancing


In the financial world, a few percentage points most of the time spell the most major movements.

This is the truth that refinancing hinges on. It doesn't mean that you are altering an original mortgage, as the name may suggest, but you are actually taking out a new mortgage to pay another.

Now, in the practical and ordinary world, that would not have made much sense -- taking out another loan to pay off another. But refinancing gives the borrower the chance to take advantage of many things, and one of them is significantly lower interest rates. As the beginning of this piece suggests, that may mean lower by two, or less, percentage points.

You may still think this an inane idea, but that just proves that you haven't taken out a mortgage yet. See, mortgages are large sums of money that have your house as collateral. Thus, a few percentage points higher or lower than the original interest rate may mean a couple thousand dollars in accumulated expenses or savings.

So I got your attention. It took the phrase "a couple thousand dollars" to do that. So, first and foremost, let us dissect what refinancing really is all about.

Refinancing may be treated as a continuation of an earlier loan, since, ideally, one would consider this only if there is a chance to close out the earlier loan either faster or cheaper. But it isn't as simple as that.

Of course.

Although percentage points may indicate that if you refinance and complete the earlier loan with a loan that offers a lower interest rate, refinancing still depends on many factors to be fully beneficial. There are charges in the closure of the second account that may offset your savings. Do not forget that this is another loan, so there are expenses involved right from the get-go, just like in your first mortgage. The main question should be: will my savings on my monthly payments eclipse the expenses brought about by refinancing?

There is also the concern about terms. If the first mortgage offers you difficult terms of payment and/or you discover possible danger zones in the contract, then refinancing may save you from financial ruin or stagnation.

A general rule would be to consider refinancing when interest rates dip at least two percentage points below original interest rates.

A hard choic, indeed, but, currently, lenders have introduced no-cost refinancing deals that derive profit from either slightly higher interest rates or passing some of the cost to the amount lent. Anyhow, this offers a new proposition for savings that deserves closer inspection. A no-cost refinancing plan that only has a slightly higher rate than the current but still significantly below your initial mortgage is still a good move.

Here are some advantages that you may want to look into to see if refinancing will be better for you.

1. Lower interest rates

2. Converting an adjustable rate mortgage (ARM) into a fixed rate mortgage (FRM)

If indicators show that current interest rates may be the lowest, then making use of this through refinancing an ARM to an FRM and having the low rates for a longer period of time is a sensible choice.

3. Speedy equity

If you have considerably improved your income and will be able to pay higher monthly payments for faster mortgage completion, then the sheer savings on speedy completion, and the lower interest accumulated, may outweigh the refinancing costs.