How to Refinance Your Mortgage

If you have a mortgage and you find it hard to keep up the payments due to some problem like a cut in your income or interest rates rising, then refinancing may be for you. When you refinance, you are actually taking out a new mortgage and using it to pay off other one. Since you still have payments to make on the new one, how is this any better?

It is better because the terms of the new mortgage will be different. Your old mortgage was most likely an adjustable rate mortgage, which means that every time the interest rates go up, so do your payments. When you refinance, you’ll negotiate lower interest rates - and you’ll make sure that your mortgage is at a fixed rate, so future rate rises will not affect it.

Knowing that your monthly payments will not rise by any marked amount for the term of your loan gives you peace of mind. It is still possible to see small increases due to the cost of insurance etc rising. But don’t forget that when you refinance, there will be added costs for the new mortgage, so you need to be sure that what you save in the interest will be worth it in the long run.

Some people might feel that if they just extend the terms - length of time - of the loan they have, that will be better and save them the cost of refinancing. But this is not so. To extend the time period will certainly mean that you pay less each month, but over the life of the loan you’ll end up paying more. This is because you’ll be paying more interest.

If you have other debts that you are paying high interest on, such as credit card debts, refinancing can be a good thing to do. This is because you can refinance to get some extra cash out and use this to pay off your debt. If the new loan is at a fairly low rate of interest, then you’ll save a great deal of money in two ways.

Firstly you’ll only pay low interest on that credit card debt instead of high interest and secondly, that interest is also tax deductible, whereas the interest on consumer debt is not.

The downside of it is that if you cannot pay your monthly installments, then you could lose your home. Credit card debt alone cannot cause the loss of a home, only unpaid mortgage debt can. Just remember that refinancing is no answer to undisciplined spending.

This is the fifth podcast of our series on getting the best home mortgage.