Before You Start

Home refinancing can be a good option because it can reduce your debt (a bad debt refinance loan) but you should check the fine print on your current loan contract to see if there are any penalties or fees for paying out the loan early. Before refinancing you should find out what the interest rate of the new loan will be, whether it is fixed or variable, and any other conditions. Seek advice if you are unsure. TIP: Although tempting, it isn’t wise to refinance personal loans for consumer items such as that new 60” Plasma TV or two weeks in Hawaii.  These type of items have no long term value, which means you are still paying for them long after they have gone.

To Refinance or Not

Refinancing tends to be advantageous if the interest rate is lowered by at least 0.50%, depending on how large your mortgage is.  However, you also need to consider when the break-even point will occur and how long you are going to reside in the home.

A 30-year mortgage of $200,000 with an interest rate of 8% produces monthly repayments of $1,468. If you refinanced at 7%, the repayments would be reduced to $1,330, a monthly saving of $138. If your closing costs amount to $2,000, you would need 14 months to reach the break-even point ($138 saving multiplied by 14 equals $2000). So this refinancing loan would only be appropriate if you planned live in your home for more than 14 months.

All Mortgages are Not Created Equal

It is not a good idea to base refinancing decisions on the stated annual percentage rate because there are other key issues.

The mortgage’s term is the time available to pay off the principal and interest on the loan. Short-term loans tend to have lower interest rates than long-term ones, but often have higher repayments.

A major decision when refinancing is whether to have a fixed or variable interest rate. Variable-rate mortgages often offer a lower introductory rate usually from one to five years, but this can jump considerably once the introductory period has expired. A variable rate product may make financial sense if you plan to live in your home for a short time and then sell it. But a fixed-rate loan is often more beneficial if residing in your home in the long-term. Interest rates are currently on a rising trend, and this makes fixed rates very attractive.

Many lenders charge a fee for ending a loan contract early. These are also called termination fees; some lenders offer “no-cost” loans where these charges are waived, but there may be a higher interest rate instead. Always carefully consider all fees and charges.

How Much Can You Save

A 30-year $200,000 loan with 8% interest rate results in monthly repayments of $1,468. The following table shows the potential savings each month and the break-even points for different refinancing rates.

Check with Your Current Lender First

Your lender may be able to provide you with a competitive refinancing deal. They already have your financial details, and so this will save time and money in processing your application. But you should shop around, do your calculations and seek advice where necessary.