Refinancing YourMortgage Loan
To refinance or not to refinance. That is the question. But, what does it actually mean? And how is it relevant (or not) to your situation? Here we will explain the facts, advantages, and pitfalls of refinancing.
Refinancing – Definition
Let’s begin with the basics. Refinancing a mortgage loan simply means replacing the terms of the current loan with new terms. The goal, to get terms that are better suited for your current circumstances.
When Should You Refinance?
- When the mortgage market interest rates go down.
- Your financial situation changes (for better or worse).
Options When Refinancing
1. Change loan period
You can now afford to pay more each month. In this case, refinancing will allow you to pay off your mortgage sooner. On the flip side, if you have run into hard times or are dealing with other unexpected expenditures, you may want to lower your monthly payments. This may be worthwhile even though this will extend the life of your mortgage.
2. Improve your mortgage rates
The real estate market is forever fluctuating. Interest rates are constantly changing, going up or down. Decreased interest rates are often an excellent reason to refinance. This offers homeowners an opportunity to not only pay less each month, but to potentially shorten the term of their mortgage.
3. Change monthly payment
Increasing monthly payments, even without a change in rates, can save you a lot of money. This is because you will be paying back your mortgage faster and pay less interest doing so.
4. Change the types of loan
Most mortgages in Israel are a combination of a few different types of loans. Each type of loan has its pros and cons. For example, if you currently have a fixed-rate mortgage that is linked to inflation, you may want to refinance. By changing to a fixed-rate loan that is not linked to inflation your risk decreases.
5. Restructure your loan
Finally, you may want to restructure a loan in order to save money. This may be because of other large purchases, or financial emergency.
Potential Pitfalls of Refinancing
So, those are the ‘pros’ of refinancing, but are there any ‘cons’ or risks to consider? The answer, in a nutshell, is yes. The following are some of the circumstances under which it would be ill-advised to refinance.
1. Repayment Fee
The primary concern of refinancing a mortgage is how much it will cost to do so. Ironically, the very action you are taking to save money can end up costing more. This is because the bank issues a charge for every transaction. In this case, homeowners are required to add a repayment fee that becomes part of the new mortgage.
2. Associated Costs
The bank also issues fees for general processes, such as opening a file, liens, appraising a home, and more. Depending on the individual circumstances, these associated costs can accumulate to the point where refinancing is no longer worthwhile.
Where to Refinance
Internal Refinance (Michzur Penimi): Refinancing internally means carrying out the transaction at the bank where you currently have a mortgage. In most situations, internal refinance is simpler, faster, and does not require a new appraisal.
External Refinance (Michzur Chitzoni): When you refinance externally, you not only change the terms but also transfer the mortgage to another bank. If your property value has increased, that can be ideal. You can receive a reduced fee with better interest rates. This option is applicable, however, only with an external refinance.
Whether or not you should refinance your mortgage depends on a few things. Your existing mortgage loans, your specific financial data, and the goals that you are trying to achieve. Such as a desire to end payments earlier or a need to reduce your monthly payments. It is important to carefully examine the difference in interest rates, the level of future monthly payments, and the effect that interest rate fluctuations will have.
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