What is a Mortgage Refinance?
When it comes to managing your mortgage, refinancing can be a powerful tool for reducing your monthly payments and overall interest costs. However, it’s important to understand that refinancing can also come with penalty costs if you decide to break your existing mortgage contract before it is up. In order to minimize these penalty costs and make the most of your refinancing options, it’s important to understand the different strategies that are available to you.
Mortgage Refinance Strategy’s
One strategy that can be highly effective is to wait until the end of the 120-day rate hold before locking in your new rate. By waiting until the end of this period, you can “watch and see” what the market does over the course of the 120-day period. If interest rates drop, you can potentially get a lower rate from your mortgage broker, which can save you thousands of dollars over the life of your loan. Most banks will allow you to lock in a new rate at no additional charge at least once before the completion date, so you can take advantage of any market fluctuations without incurring additional costs.
Another strategy to minimize penalty costs is to use the pre-payment method. This involves paying down a portion of your mortgage principle before the refinance takes place. Depending on your lender, you may be able to pre-pay up to 20% of your mortgage annually. By doing this, you can reduce your penalty costs because a good portion of the principle has already been paid off. However, this strategy does require the use of other resources, such as borrowed funds, investment funds, or savings. This can be a great way to reduce your total penalty costs, but it will require some strategic planning and careful consideration of your own financial situation.
If you are able to find the resources to pay down the full pre-payment privilege before the mortgage funds, you can save thousands in penalty costs. And because it is a refinance, you will recoup those funds back as long as you were approved for the total amount prior to pre-payment. This can be a great way to not only minimize penalty costs, but also reduce your overall mortgage balance and save on interest costs in the long run.
Is Mortgage Refinancing always good?
It’s important to understand that refinancing is not a one-size-fits-all solution and it’s important to weigh all the pros and cons before making a decision. There are also potential risks involved in refinancing such as if interest rates rise after you refinance, you may end up with a higher rate than you had before. Additionally, if you refinance into a longer term loan, you may end up paying more in interest over the life of the loan. Another risk to consider is the potential impact on your credit score. Refinancing can result in a hard inquiry on your credit report, which can temporarily lower your credit score. Additionally, if you have a lot of outstanding debt or a high debt-to-income ratio, it may be more difficult to qualify for a refinance.
It’s also worth noting that refinancing can be difficult in a market where property values are stagnant or in a downward trend. If your home’s value has decreased, you may not be able to refinance for as much as you owe on your existing mortgage. This can limit your options and make it more difficult to find a refinance solution that works for you.
When considering refinancing, it’s important to speak to a mortgage broker to confirm your eligibility and determine if this solution suits your short-term and long-term needs. A mortgage broker can help you understand