When Mortgage Refinancing Is an Excellent Idea

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. As part of the process, the mortgage holder pays the remainder of the old mortgage with the new mortgage, basically replacing the first mortgage with the second mortgage. Mortgage refinancing can be a valuable financial tool as long as the terms of the new mortgage are chosen with care.
For instance, a lower interest rate is generally a sign that a mortgage is a good investment. The interest rate is the most important variable in determining the total cost of a loan, so a lower interest rate usually adds up to considerable 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. Because this kind of loan can be ruinously expensive in the long run, it should be chosen only if the homeowner cannot make higher payments because of relatively short term financial difficulties, but knows he or she will be able to make higher payments soon.
Another factor to take into account is whether the new or old mortgage have extra fees tacked onto them. 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. Because paying off the mortgage within the penalty period can be pricey, there may be no savings in taking out a new mortgage.
However, mortgage refinancing is a sound financial move if the first mortgages penalty period has passed, interest rates are low, and fixed rate mortgages are available. 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.