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 [Refinancing your home - when is this a good idea?]

Refinancing – this word literally means obtaining another loan from another lender while paying off your current loan. Many homeowners have heard about the recent drop in interest rates and have been tempted to refinance their home mortgage which is tied to fixed rate mortgages. However, many are not truly aware of the pros and cons of refinancing and thus should examine their options closer in order to make an informed decision.

What You should look for when refinancing your home

The first thing that a home owner should look at is the terms and conditions of the current mortgage as certain mortgage plans come with a prepayment penalty which may cost more than the cost savings of refinancing in the first place. The next step would be to evaluate a few refinance options from various vendors, each offering home refinancing packages which may vary not just in terms of interest rates, but also in terms of processing fees, insurance costs and monthly repayment amount.

Basically, refinancing would be a viable option if the long-term cost savings are tabulated to be greater than that of the current mortgage, inclusive of all refinancing and closing costs applicable. Among the influencing factors is the number of years left for repayment in the current loan, the expected length of stay in the property in the future, the current monthly repayment amount and the terms of the next mortgage contract.

In the end, apart from the lower interest rates and cost savings, there may be other reasons why a home owner may want to refinance. For instance, if a large portion of the outstanding principle of the existing loan has already been paid up, refinancing may be one way to obtain cash from for renovations or education for children, as a newer and larger mortgage is being taken up. Additionally, some home owners may want to increase their home equity and can afford to pay higher monthly repayments and shorten the loan period at the same time. This results in less interest payments parallel with the reduction of the loan period for the new loan taken up.