What is Mortgage Refinancing?
Mortgage refinancing is the set off of a previous mortgage by securing a new mortgage of the same property, generally for a lower interest rate. As both mortgages are secured over the same asset the proceeds from the new loan are directly used to repay the previous unpaid mortgage amount. The new mortgage can only be used for repayment and no other purpose, except if any of the loan amount is present after the previous loan is repaid it can be used for any other purpose.
Refinance can be used for a number of uses, such as Home improvement, lower interest rate, increase repayment period, reduce monthly payment and change in rate e.g. from fixed to adjustable etc. For uses such as home improvement a loan is secured for an amount more than the outstanding amount so the excess after repayment can be spent on home renovations.
For reducing monthly payments a new mortgage can be taken for a longer period, which would substantially reduce monthly payments but would lead to an increase in rate of interest. There has to be an optimization of both time period and rate of interest to suit your needs. If it is predicted that the variable rate of interest on mortgages shall rise it is better to refinance applying for a fixed rate of interest. If it is foreseen that in the future the rate of interest will reduce the customer can refinance so as to apply for a variable rate of interest.
There may be a case where you might like to reduce the time period for repayment, if you can afford to pay higher monthly payments. A good time to refinance is when the rate of interest on mortgages has dropped. The thumb rule in such a situation is to go in for a refinance when the difference in interest rate is more than 2%. There is no limit to the number of times you go in for mortgage refinancing.
It is generally advised when the value of property is running low you should refrain from refinancing. If you have been repaying your existing mortgage for a long time period there is no reason for refinancing where the new mortgage has a long time period as well as this would increase overall payment made. If only a few years are left for repayment of mortgage, it is advisable not to go in for refinancing.
There is no fixed rule as to when to refinance and when you should not, it is according to the wishes and the need of each individual customer. Each customer according to his needs, his advantage or in the face of contingencies has the prevailing option to refinance.