To refinance or not to refinance? That is the question so often heard in the world of mortgage loans today. But what does it actually mean, and how is it relevant (or not) to your situation? We’ll answer these questions here to help you make an informed decision based on the facts.
Let’s begin with the basics. Refinancing a mortgage loan simply means replacing the terms of the current loan with new terms better suited to your current circumstances.
When Should You Refinance?
Lower mortgage market interest rates
A change in your economic circumstances (for better or worse).
Options When Refinancing
Change loan period: For example, you can now afford to pay more each month, in which case refinancing will allow you to pay off the 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, even though this will extend the life of your mortgage.
Improve your mortgage rates: The real estate market is forever fluctuating, with interest rates intermittently going up and down. Decreased interest rates are often an excellent reason to refinance, offering homeowners an opportunity to not only pay less each month, but to potentially shorten the term of their mortgage. In fact, the experts recommend regularly checking the state of the market rates, as even a slight drop could save you a pretty penny (or shekel).
Change monthly payment: Increasing monthly payments, even without a change in rates, should save you a lot of money since you will pay paying back mortgage faster and pay less interest doing so.
Change the types of loan: You can also change the risk of a mortgage by changing the loan type. Most mortgages in Israel are a combination of different types of loans where 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 that is not linked to inflation.
Finally, you may want to restructure a loan in order to save money in the face of other pricey or unexpected expenditures, i.e. a large purchase or a financial emergency.
Potential Pitfalls of Refinancing
Those are the ‘pros’ of refinancing…but are there any ‘cons’ or risks to consider when changing an existing mortgage arrangement before the end of its term? The answer, in a nutshell, is yes. The following are some of the circumstances under which it would be ill-advised to refinance.
Repayment fee: The primary concern or potential pitfall of refinancing a mortgage lies in how much it will cost you to do so! Ironically, the very action you are taking to save money over the long term could end up costing more than you had bargained for. This is because the bank issues a charge for every transaction, refinancing non-withstanding. In this case, homeowners are required to add a repayment fee that becomes part of the new mortgage. The latter is calculated by the difference between their existing interest rate and the current market interest rates.
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 worth your while.
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, this can be ideal, offering you a reduced fee with better interest rates. This option is applicable, however, only with an external refinance.
The viability of mortgage refinancing depends on the existing mortgage loans, your specific financial data, and the goals you are interested in promoting. These range from a desire to end payments earlier to a need to reduce the monthly repayment. As part of the mortgage feasibility study, it is important to carefully examine the interest rate differentials, the level of future monthly repayments, and the effect that interest rate fluctuations will have on those repayments.
To Refinance or Not to Refinance: Best Advice
It turns out that making an informed decision about restructuring a mortgage loan is not as simple as it appears on the surface. To help you get the best rates, sort out the complexities and make sure that you are basing your decision on solid advice, be sure to contact [email protected], where an experienced mortgage broker will sit down with you, review your situation, and guarantee that your needs are being met.