Want To Refinance Your Mortgage? 3 Tips You Should Consider

Refinancing your mortgage means replacing a previous loan with a new loan that has a comparatively lower interest rate on the same asset. To put it in simple terms, let’s say you have a home loan with your current bank but another bank or the same bank is offering a similar loan with a substantially lower interest rate. Mortgage refinancing sounds like a perfect option for every loan but there are few things you should consider before diving in.

What exactly is mortgage refinancing?

Mortgage refinancing is the concept of taking up a second loan with better interest terms and rates and using it to pay off the first loan.

It is usually considered by those whose EMI’s and monthly payments take away a major chunk of their earnings(more than 70{72bfd9cbd9abbf4da0ec979aefd53e69556132357608965afc078d1b54febdb4}) and they want more expenditure power for their household. Mortgage refinancing is also considered by people who just want a higher quality repayment method.

Why should you consider mortgage refinancing?

Here are some situations in which refinancing your mortgage might be useful for you:

  • You took up a loan in your past but the current interest rate has gone down significantly. In this case, replacing your old loan with a new one is ideal.
  • The tenure is too long to be financially borne by you so you can take up a new loan to shorten the previous one’s tenure.
  • You have two loans that can be merged into a single loan. In this case, the premium that you are paying can be reduced greatly

For whom is mortgage financing meant for?

Let’s say there are two friends Ashok and Sunil. Ashok recently bought a 3 BHK apartment in the same locality as that of his friend. To pay for his home, He took up a loan of 15 years tenure with an interest rate of 10{72bfd9cbd9abbf4da0ec979aefd53e69556132357608965afc078d1b54febdb4}. Sunil, on the other hand, had taken up a loan of 12 years tenure with an interest rate of 11{72bfd9cbd9abbf4da0ec979aefd53e69556132357608965afc078d1b54febdb4} that started 6 years ago.

They both find a new bank willing to offer them refinancing at an interest rate of 9{72bfd9cbd9abbf4da0ec979aefd53e69556132357608965afc078d1b54febdb4} with a tenure of 17 years. In this case, Ashok should consider taking up the new loan as his repayment has just started. Sunil, on the other hand, has already gone through 50{72bfd9cbd9abbf4da0ec979aefd53e69556132357608965afc078d1b54febdb4} of his tenure. Even with a lower interest rate, when combined with the refinancing fees and the load of an extended tenure, it would not be a financially favorable decision for him.

Refinance tips to keep in mind 

If you’re thinking of refinancing your mortgage, ask yourself these questions:

  • Has your asset’s value gone down during the tenure?
  • Have you gone through with more than 40{72bfd9cbd9abbf4da0ec979aefd53e69556132357608965afc078d1b54febdb4} tenure of your tenure?
  • Is the difference in the interest rates less than 2{72bfd9cbd9abbf4da0ec979aefd53e69556132357608965afc078d1b54febdb4}?

If your answers to all the above questions were no, then maybe you should look at other options as refinancing might not be a good fit. Although some investors and financial advisors advocate the fact that a 1{72bfd9cbd9abbf4da0ec979aefd53e69556132357608965afc078d1b54febdb4} interest rate is also good enough to be considered if it saves you money, your entire focus should be on the bigger picture. There are plenty of refinancing calculators available on the internet. Make use of them to calculate whether it is a viable option for you or not.

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