Why do people opt for mortgage refinancing?
Put simply, mortgage refinancing is replacing your current mortgage with a new one. It means breaking you current mortgage and starting a new mortgage. Oftentimes, when homeowners refinance they will get a new mortgage that is bigger than the one they previously had so that they can use some of their home equity to receive cash.
Some people confuse refinancing with a second mortgage but it is not exactly the same thing. With a second mortgage, you do not break your first mortgage – it is a loan that you have in addition to your first mortgage. With mortgage refinancing, you start over to put the entire amount into one loan.
There are three main reasons why a home owner might choose to refinance their mortgage:
- To lower their interest rate – perhaps your first mortgage has a higher than average rate (either because rates have dropped recently or because you could not qualify for a lower rate at the time you first got your mortgage). If you can qualify for a lower rate, then refinancing your mortgage could end up saving you thousands of dollars over the lifetime of your mortgage.
- To access cash from your home equity to pay for an expense – if you have a major expense that you need credit for such as a home renovation or the funds to invest in a new business venture, then mortgage refinancing may be an option to get that cash.
- To consolidate your debt – this may be the most common reason of all for mortgage refinancing. Some form of credit such as payday loans and credit cards can have very high interest rates. The interest rate for refinancing your mortgage will be considerably lower. In fact, in many situations the interest is low enough to significantly reduce your monthly payments each month and help you pay off your debt years earlier.
Is mortgage refinancing right for me?
It depends. If the amount of money that you will save is great than the amount of penalty you will have to pay, then refinancing indeed may be the right tool for you. If it’s not the right option, your mortgage broker can show you other strategies that are more appropriate for your situation. If you would like to find out if this option makes sense for you, then contact us for a consultation today.