Crippling debt can have you scurrying around for refinancing when the prospects of increasing your income aren’t looking so rosy. And whilst this can provide immediate relief, the financial benefits can be short-lived. So the question of when to refinance is fairly tricky as it requires a smart approach.
When you refinance on your mortgage you’re simply paying off your mortgage debt using a new loan. In essence, you’ll be extinguishing your current loan repayment obligation with another one. Homeowners have several reasons for doing so. Some want to shorten the duration of the loan and take advantage of lower interest rates. Others are enticed by the opportunity to maximise on their existing equity by using that as leverage for home improvement loans. Then others are simply strapped for cash and just want to avoid foreclosure at all costs. However, refinancing should always be a last resort as it’s not always rainbows and unicorns on the horizon.
Amending Loan Agreement Terms: Switching Between Fixed and Adjustable Rate Mortgages
To dispel the rumors and suspicions it is important to make it clear that refinancing doesn’t just imply acquiring a new loan. In a lot of ways, it entails the amendment of terms that have been agreed to previously in order to make repayment easier. As such, you get lenders willing to sit down with you and discuss a practical way forward. For example, switching between fixed rate and adjustable rate mortgages can give debtors breathing room if it means they can tap into lower interest rates. At a time when the economic environment is thriving, 10 good years of consistently low-interest rates will help you pay off your mortgage faster than when you adhere to a fixed rate.
In theory, the reasons for refinancing a home are compelling. But in reality, it’s not always advisable. So before taking this ‘leap of faith’, ask yourself a few questions.
1. Is there equity in my home. Most lenders expect equity of at least 20% before approving a new loan. Do your homework first!
2. How good is my credit score? If it’s anything below 650 you might struggle to convince lenders. Take time to wallpaper the cracks.
3. What are my current and future plans? Refinancing is a bid deal and requires foresight. Factors like your present employment circumstances and the prospect of retirement should play a huge part in the decision-making process.
According to Wadzanai Munjanja -a senior financial accountant at Ernest&Young- ‘a gut-feeling approach to refinancing is like relying on the weather report. In as much as it’s all figures and calculations, it can be unpredictable.’ The best way to be absolutely sure of when to refinance- and even that’s impossible- is to consult with experts before making a decision that will affect you for the rest of your life.