The Formula To Help You Decide Whether To Refinance Or Not

There are many reasons why it may be beneficial to refinance you home. The obvious one is the possibility of saving money. Depending on the interest rate of your current mortgage, and how long you have been paying it off, there could be a huge reduction in the monthly payments to be had. But that will largely depend on the term you want to spread your new mortgage over.

Many people seek to either shorten or lengthen the term of the loan. Changing personal circumstances such as a redundancy or a cash windfall may mean that you have a higher or lower capacity to make repayments, and need to renegotiated the terms of your mortgage to suit.

An increasingly common reason people refinance is to consolidate debts into the one loan. You may have other debts that you wish to pay off, and refinancing may provide a means of rolling all you debts into one overall lower payment. This option can be a ‘double edged sword’.

Whilst you may significantly lower your monthly outgoings, you will more than likely end up paying more in the long run, due to having rolled a relatively high interest one or two year loan, into a much lower rate mortgage that may still have 20 years to run.

Another reason that some people refinance is if their original mortgage was structured with low initial repayments with a balloon payment due at the end. It’s unlikely that many borrowers have the cash resources to pay out the final payment, so they will either have to sell the property when this payment is due, or refinance the mortgage, and continue paying it off.

The interest rate isn't the only thing that should be taken into account when thinking about refinancing. There are often substantial fees and charges associated with refinancing your mortgage. Most lenders will require new valuations, title searches and property inspections to re-assess the property value at its current market value, and these costs will all be borne by you the borrower. Plus your lender will also have a series of standard fees for establishing a new mortgage, just like you had to pay with your original loan.

Working out the viability of whether to refinance or not, is a relatively simple process. You just need to know the total loan re-establishment costs, and the net amount you are going to be saving each month. Then work out how many months it will take you to ‘break even’. So long as you plan on keeping the property for longer than it will take you to break even, then the deal is probably a smart move.

For example, if it’s going to cost you a total of $3000 to refinance, and you are going to save $200 every month, then you’re break even point is 15 months away. Unless you plan on selling up in under 15 months, refinancing would probably be advisable. Make sure you add the re-establishment cost onto the new mortgage, and you’ll "feel no pain" while you wait to break even, the deficit is only "on paper", and not coming out of your pocket.

This article is intended to be very general in nature. Refinancing is something that needs to be carefully checked our, particularly in times of volatile interest rates, therefore you should always seek independent professional advice that takes into account your own personal circumstances before entering any new financial arrangement.