Mortgage refinancing is a process in which a mortgage holder, usually a homeowner, takes out a new mortgage with better terms than the old mortgage. In the process, the mortgage holder pays off the old mortgage, essentially replacing one loan with another. If the new mortgages terms are chosen carefully, mortgage refinancing can be a valuable method of improving ones finances.
For instance, a lower interest rate is generally a sign that a mortgage is a good investment. In determining the total cost of any type of loan, the interest rate is the variable with the most weight, so a mortgage with a lower interest rate usually offers substantial savings. On the other hand, mortgages that offer a lower monthly payment without also offering a lower interest rate (for instance, loans that offset a higher interest rate by extending the term of the loan) have a higher total cost. This type of loan should be chosen only when the homeowner is having difficulty making higher payments at the moment, but foresees being able to pay more per month in the future.
Another detail to consider is any fees that might be added onto either the old or the new mortgage. For example, it is common for a mortgage to have fine print that requires the holder to pay a penalty if the mortgage is paid off within a set time after taking out the loan. The penalty is designed to prevent the mortgage holder from closing the loan too early for the bank to make a decent profit. Most mortgages have this kind of penalty attached, and normally the penalty period does not pose a problem. For instance, a one year penalty period on a twenty to thirty year loan is not burdensome; the likelihood that the mortgage holders will be able to pay off the loan or will try to get mortgage refinancing within the first year is extremely low. However, if the loan is one of the few with a longer penalty period, the homeowner can effectively be prevented from getting mortgage refinancing during a period when interest rates have dropped to attractively low levels. If paying off the original loan within the penalty period incurs a substantial charge, the cost savings of a new mortgage may be completely wiped out.
However, if the homeowner is outside the penalty period, interest rates are low, and it is possible to get a new fixed rate mortgage, mortgage refinancing is a sound financial decision. Reading all the fine print, including the details the lender does not highlight, can lead to considerable savings. With some thought and care, mortgage refinancing can lead to increased financial stability and a bright financial outlook.