|
Though
some mortgages turn out to be the lifetime commitment, you may
choose to refinance a new mortgage at a lower rate or for a
different term. With the new money you borrow, you pay off the
original mortgage. |
You may want to refinance your
mortgage for several reasons:
|
• |
You can get a lower interest rate,
which will reduce your monthly payment and often the overall cost of the
mortgage. |
|
• |
You may want to consolidate outstanding
debt, for example, by combining a first and second mortgage into a
single new one or pay off High (non tax deductible) Interest debt
such as credit cards and auto loans. |
|
• |
You may want to reduce the term of your loan
to build equity faster. While this may increase your monthly
payment, it will dramatically reduce your total cost. |
|
• |
You may want to use the equity in your home
for a major purchase, such as a child’s education and home
improvement. |
|
• |
If you are paying private mortgage insurance
(PMI), you should find out the increased value of your home since
you purchased it. It is possible that if you refinance, your new
Loan to Value (LTV) will not attract PMI. |
|
• |
If you’re currently have an ARM
(Adjustable Rate Mortgage), by switching to a fixed rate mortgage
is most likely going to reduce your payments. |
|
• |
Do you have a prepayment penalty on
new or old loan? (Refinancing when repayment penalty is payable
may not give you full financial benefits of refinancing. |
|
• |
Do you know what Adjustable Rate
Mortgages are? (It is important to understand the nature and
mechanism for ARMs so that you don’t have surprises when the
rate is adjusted). |
|
• |
Have you done analysis of costs and
benefits of new loan? (It is important to calculate the costs
you are going to incur and compare with your objectives of
refinancing). |
Example:
Lets take a hypothetical
example of Mr. X’s income, expense and credit obligations. Following
is the summary of Mr. X’s financial scenario:
|
Credit Obligation |
Balance |
Interest Rate |
Monthly Payment |
|
Home Mortgage |
280,000 |
6% - 30 Yrs Fixed |
1,678.74 |
|
Auto Loan |
15,000 |
5% - 60 months |
283.00 |
|
Credit Cards |
10,000 |
18% |
300.00 |
|
Student Loans |
20,000 |
4.5% - 10 Years |
240.00 |
|
Unsecured Personal Loan |
10,000 |
16% |
300.00 |
|
Time Share |
18,000 |
- |
350.00 |
|
Shopping Store Credit Card |
5,000 |
22% |
150.00 |
|
Total |
358,000 |
|
3,301.74 |
|
If Mr. X decides to refinance his existing (6%
fixed) mortgage of $ 280,000 with a new mortgage of $ 365,000 (6%
fixed), his monthly payment will be $ 2,188.36. |
|
The following are some of the benefits for Mr.
X’s refinancing decision: |
|
• |
Mr.
X has reduced his total monthly (credit obligation) payments
from $ 3,301.74 to
$2,188.36. He will be saving $ 1,113.38 per month or $ 13,360.56
per year. |
|
• |
Mr. X has paid off debt of $
78,000. This amount is now included in the new mortgage.
Interest on this amount is now deductible for the purposes of
Income Tax. (please consult your tax advisor to discuss your
situation). |
|
Note: The above examples are given for illustrative purposes
only and are based on hypothetical situation. Actual monthly
payments, closing costs and APRs may vary. |
|
