Most frequently, borrowers consider mortgage refinancing for lowering their monthly instalments, however there are a number of other legitimate reasons to refinance. Apart from reducing the periodic payments, refinancing mortgage can be beneficial to those who want to consolidate their outstanding debt that could be comprised of two or more mortgage loan instruments into only one lower-interest bearing loan. Additionally, it can be utilized as a home equity loan or just as a way to exit from a loan facility that does not meet the needs of the borrower anymore. For instance, an expensive fixed-rate mortgage can be refinanced into an adjustable-rate one producing less recurring interest expense for the borrower.
Depending on a number of differentiating factors, refinance mortgage can be either a very lucrative loan strategy or at some other instances can generate uncoverable costs. The conventional rule that refinancing makes financial sense when rates have dropped 2% may not make practical sense to a specific borrower. Usually, the actual threshold is much less than 2% for long-termed mortgages. Even half-a-percentage point differential can make a big difference when compounded for 20 or 30 years.
In some other cases, particularly when the mortgage is a short-lived one, the incurred upfront costs can outweigh the benefit from the lower rate. Therefore, the initial costs and the time frame of the mortgage at hand are almost as important factors as the interest rate differential. Oftentimes, however, the time frame of the mortgage is bound to the borrower’s choice to repay it before its maturity. Analyzing a different set of scenarios with time frame versus interest rate differentials possibilities and comparing break-even time points can prove to be very useful exercise for all mortgage loan receivers.
Another crucial factor when deciding on refinancing mortgage is the amount to be borrowed or extracted in the case of a home equity mortgage. Not overextending the loan amount above 75-80% of the property’s current market value is a sound practice as this will name this mortgage a “conforming” loan. Non-conforming mortgages or jumbo loans as they are known bear much higher interest rates. The negative part of the refinance mortgage equation is the upfront closing costs. A wide array of costs such as origination costs, property appraisal fees, attorney review fees, title and credit check fees, and realty transfer taxes can easily constitute a significant burden and make mortgage refinancing a loss producing strategy extending the pay-back period to perpetuity.