Primary Reasons for Mortgage Refinancing

1. You can benefit from lower monthly payments by switching to a lower mortgage rate loan.
2. You can pay off a home loan, or build up equity (the proportion of your property that you own outright) more quickly by switching to a shorter-term loan (e.g., switching from a 30 year loan to a 15 year loan).
3. You can avoid the possibility of interest rate fluctuations by taking advantage of today’s low interest rates and converting from an adjustable rate mortgage (ARM) to a low, fixed-rate home mortgage.

1. How long do you think you will own the property in question?
   • Long enough to realize the benefits in spite of the costs?
   • Long enough to break-even? Calculate here
   • Do you think you might be starting a family or need to look after an aging relative in the next few years? Will you need to purchase a larger home sometime in the near future?
2. How much will mortgage refinancing cost you in points, closing costs, and transaction fees?
   • Make sure you ask several different lenders for a mortgage quote with an itemized list of the expenses involved.
   • Determine whether a higher interest rate is better than paying points. Mortgage calculators are very useful in helping you compare costs between different mortgage quotes from mortgage lenders and brokers.
3. How long have you held your current mortgage?
   • Most mortgage repayments comprise a proportion of the interest and the principal. The ratio of interest to principal changes through the term of the mortgage. Typically, a borrower pays more interest at the beginning of a home loan term than towards the end. At the end of the loan term, they are not able to deduct as much interest. Make sure you factor this into your calculations.

1. Mortgage refinancing can sometimes extend the time it takes for you to own the home “free and clear”.
2. There may be a prepayment penalty associated with your existing loan being refinanced. Check with your mortgage lender to see if this is the case.

Lenders can work with you to give you the mortgage information you need. Having discussed your needs with you, they should be able to offer you a mortgage loan quote tailored to your individual situation. Make sure you compare different offers from different companies. Again, mortgage calculators are useful for doing this.

Home Equity as Cash
There are two types of home equity options:

1. Home Equity Loan
   1. Traditional, fixed rate loans are simple to understand and work well if you need a lump sum of cash.
   2. This type of loan can be a good option if you need to pay medical expenses, college fees, or you are considering consolidating debts.
   3. Most home equity lenders allow you to make payments over a mid or long term of 10 to 30 years.
   4. Interest payments on home equity loans are often tax deductible. Check with a qualified mortgage or financial advisor.
      
      Weigh the benefits of taking out a home equity loan versus mortgage refinancing combined with taking cash out. Make sure you understand the differences between these two options and ask your lender to go through the details with you to ensure that you have all the mortgage information you need to make an informed decision and to get the best mortgage rate and overall loan offer.
2. Home Equity Line of Credit
   1. A home equity line of credit is a more flexible method of borrowing money in that you do not take have to take the entire loan amount all at once and you can continue to access more funds as you pay down the outstanding loan balance.
   2. This is a good option if you have an unpredictable need of cash in terms of how much, or when you might need it. Typical uses of a home equity line of credit include small home improvements, debt consolidation, or unexpected medical bills.
   3. The credit limit you will be offered will be based on the equity in your home: your home’s appraised value, minus the total existing mortgage balance.
   4. One of the greatest benefits of a home equity line of credit is that you only pay interest on what you ‘draw down’ or use. Therefore, you will not be paying interest on a loan that you are not using.
   5. The interest you pay is often tax deductible. (Please see a qualified tax adviser.)

Potential Disadvantages of Borrowing Equity:

1. Your home is collateral if you are unable to make payments. In other words, if you  fail to make repayments, the lender can, and in many cases will, repossess your home.  Be sure to use a mortgage calculator to help to determine if you can afford and keep up with monthly payments.
2. The definition of equity is the value of your property that you actually own outright. If you tap into the equity too freely, you will be reducing your actual equity. Make sure that this is on the right decision for you prior to borrowing.