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Most discussions of the mortgage refinancing have concentrated on the case in which the existing principal is refinanced but no new borrowing is undertaken. A homeowner faces the question of whether to go for a mortgage refinancing whenever current mortgage interest rates drop below the rate on the homeowner's existing mortgage. To determine the attractiveness of refinancing, homeowners must weigh the prospective after-tax savings from lower interest costs against the costs of the refinancing transaction itself, including any mortgage fees (points), application and appraisal fees, and other costs associated with obtaining a new mortgage, as well as any prepayment penalty on the old mortgage.
Because savings on interest accumulate gradually over time as scheduled payments are made, the amounts saved with each payment must be discounted to the present value by some appropriate rate, and the sum compared with the total cost of mortgage refinancing. If the discounted present value of the stream of prospective after-tax savings in interest payments exceeds the after-tax refinancing costs, a homeowner might opt to refinance. However, several other considerations generally complicate the decision.
Cost Motivations Affecting the Decision
One consideration is the possibility that the homeowner might sell the property before the mortgage maturity date, thus reducing the total (and present value) of expected future interest savings. If the property were sold relatively soon after a mortgage refinancing, the savings in interest costs that had accumulated by that time would probably not offset the transaction costs associated with obtaining the new loan, unless the reduction in rate were unusually large.. This uncertainty about length of residence is one reason that most rules-of-thumb about whether to refinance incorporate the dictum that the costs of refinancing be recoverable within two years.
Uncertainty about the future course of interest rates also affects the mortgage refinancing decision. Seemingly, a homeowner should refinance whenever mortgage interest rates drop enough to generate a positive net saving on interest costs within a reasonable period of time. However, the timing of this decision is important because, if interest rates continue to fall, the homeowner will reap even larger savings by waiting to refinance.
Thus, the decision to refinance depends on the homeowner's expectations about future interest rates weighed against the amount of savings available from an immediate mortgage refinancing, guided by the homeowner's willingness to forgo a known gain for the possibility of a larger one. Generally speaking, if a rise in rates and a fall in rates of the same amount were viewed as equally likely, and the savings currently available from refinancing were relatively modest, the typical homeowner with a fixed-rate mortgage would probably choose to wait.
The most that could be lost in the event of rising rates would be the relatively small savings currently available--a large rise in rates would have no more adverse effect than a small rise in rates.
But a large drop in rates in the future would allow a large reduction in interest costs, so that the possible benefits of waiting to refinance would outweigh the possible costs. The situation is different if the homeowner has an adjustable-rate mortgage; in that case, the prospect of rising rates creates a greater incentive to refinance because it is possible for the rate on the existing mortgage to adjust to some level above the current one. Before the 1980s, virtually all mortgage refinancing involved the payoff of one fixed-rate mortgage with the adoption of a new fixed-rate mortgage. But the growth of adjustable-rate financing in the past decade has multiplied the possible configurations a mortgage refinancing can have: A homeowner can also move from a fixed-rate loan to an adjustable one, from an adjustable to a fixed, or from one adjustable-rate loan to another.
The decision to go for a mortgage refinancing with an adjustable-or with a fixed-rate mortgage involves many of the same factors considered in the creation of the original home-purchase mortgage. Adjustable-rate mortgages (ARMs) are typically offered with initial rates lower than those available on fixed-rate loans--sometimes with deeply discounted rates for the first year or two. But, because the rate is adjustable, the borrower is exposed to increasing interest expense should rates rise, subject to the allowed frequency of adjustment and the limitations of any annual and lifetime caps on the mortgage rate.
The two major reasons that homeowners go for a mortgage refinancing are to reduce their debt-servicing costs by obtaining a lower interest rate or to raise additional funds by increasing the principal owed. These reasons are by no means mutually exclusive, of course; those who raise new funds may be motivated by an opportunity to lower the interest rate as well. Overall mortgage refinancing activity in coming years will depend in an important way on movements in interest rates, is it always has. Unless mortgage interest rates drop substantially or exhibit wider swings in the next few years than they have since the mid-1980s, the incentive to refinance as a cost-reducing measure will probably be muted in the near to medium term. However, refinancing to raise new funds, and borrowing through home equity loans, could be expected to grow proportionately with general economic activity. Although more sluggish increases in real estate values recently may damp consumer appetites for liquidizing equity and may influence creditors to lend more cautiously, the amount of untapped equity in the country remains substantial and growing.
The article is from creditloan.com
How to apply for a mortgage refinancing?
There are so many mortgage refinancing deals available from banks and non-banks, it can be difficult to choose the right one for you. You can use the enquiry form to apply and letting an expert get you the best deal.
Remember it is FREE to apply online through firstloans.com.au.
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