What does refinancing actually mean? It means: replacing your existing mortgage with another, lower interest rate loan. There are many good reasons to consider refinancing, including lowering your repayments, shortening your loan term, taking advantage of your home’s equity, debt consolidation, cash out options etc.
Mortgage refinancing can save you a lot of money if you do it right. Overpaying on your mortgage, when refinancing, is a common mistake that homeowners make, which costs them thousands of rands in interest.
Deciding if you should refinance or not depends greatly on what your financial goals are.
If you are refinancing in order to pay less interest, you would not see the savings right away. This is because financial institutions charge fees when you take out a new mortgage, and in some cases you also have to pay a penalty for canceling your old mortgage. To determine whether refinancing makes financial sense for you, consider these issues:
The Loan Term
It will not make sense to refinance your mortgage and start over with a 20-year term should your existing mortgage almost be paid off.
The Interest Rate
A percentage drop of just one half to three quarters of a percentage point can result into huge savings over the long term.
However, to get the benefits of a lower rate, you may have to pay fees associated with the mortgage.
Refinancing is a lot like getting a new mortgage. Your lender may charge certain fees to facilitate your new loan. The benefits of refinancing add up over time, so if you do not plan owning your home for much longer, the lower payments associated with the refinancing may not cover the costs involved.
As a rule of thumb, the longer you plan to stay in your home the more sense it will make to consider refinancing. If your refinancing expenses can be recovered within the first 24 months of the new loan, mortgage refinancing is probably a good idea.
Pre payment penalties
Many mortgages carry a penalty if you pay them off early. If you do not wish to pay such a fee you will have to give your financial institution a 3 month / 90day notice period. Some however do not charge such a fee and you should go through your original loan documents to make sure.
The break-even point
If you can determine your break-even point, then you can start figuring out when you will start saving money. This involves a very simple calculation.
Start of by calculating how much you will save by lowering your monthly payment. Then add the costs associated with refinancing and divide the total by your monthly savings. This will give you an indication of the number of months it will take to reach the break-even point.
However to get a more accurate estimate, use our financial calculators on http://www.globalproperty.co.za