To Refinance, or not to Refinance, that is the Question

Homes conceptI must first apologize to those who are fans of William Shakespeare or of his famous play “Hamlet.”  Those who are not familiar of the two mentioned above would fail to notice the play on words that I used for the title of this article.  In the play, Prince Hamlet ponders death as he struggles to decide if he should commit suicide.  In the Nunnery scene, the opening speech started with what was destined to become a famous phrase, “To be, or not to be, that is the question.”  The importance of that famous question mirrors for many an important decision to make as to refinance an existing mortgage is not always the answer.  There are factors that need to be considered because refinancing may be beneficial, remain the same or prove to be disastrous.  With that said, it is important to know what this means in regards to an existing mortgage, the risks involved and how it can be beneficial in the end.  When all is said and done, only then can one decide if this option will save a drowning man or cause him to sink to the bottom of the ocean.

What is a Refinance mortgage?

Someone who is an alcoholic needs to first admit he/she is one and wants to be “cured.”  In order to know if this option can benefit the borrower, it is important to know what it means.  Usually, a homeowner will look to see if it is possible to take an existing debt obligation, a mortgage in this case, and replace it with another but under different terms.  Though this scenario seems to benefit the borrower, the conditions and the terms of this refinance could vary wildly depending on the province or country.  Also, other factors can come into play based on an individual’s economic situation such as if the person has a low credit score or if the lender feels the risk for default is too great of a chance to take.

Reasons why a Refinance is a good option

Some homeowners are forced into this option due to being under financial distress.  In this case, those people who take this type of a loan look at what they are doing and refer to it as debt restructuring.  There are several reasons why refinancing would be a good option:

  1. To take a better option in regards to a better interest rate that includes a reduced term or a lower monthly payment rate.
  2. To combine multiple debts into one loan which could potentially lead to a longer/shorter term contingent in regards to interest rate differential and fees.
  3. To lower the repayment amount for each month which would mostly lead to a longer term, contingent on interest rate differential and fees.
  4. To alter or reduce the risk of a default.  An example would be to switch from a variable-rate to a fixed-rate loan.
  5. To make available cash sooner than later in exchange for a longer term, contingent on interest rate differential and fees.

For homeowners to decide on a refinance of their homes for reasons 2, 3 and 5 are those who are in some financial difficulty.  While this solution may solve the immediate problems, this type of a mortgage has their risks that could be felt down the road ahead.

Why a Refinance mortgage can be risky

In life, people try to find an equal balance in life and one way to achieve this is by making the decision based on a current situation.  Another way is to think of both the short term consequences and the long term consequences.  Deciding if this type of a loan is the solution for a current crisis may be correct but down the road you may regret it.  Someone in financial difficulty may decide that type of a mortgage would help solve their immediate problem; however, the new loan will now take longer to pay off as well as any new fees for doing this. photodune-4126738-home-xs There are some people who are called refinancing junkies because every time a lower interest rate becomes available, the owner will take out a new mortgage.  These borrowers who continue to do this will pay a hefty price in closing costs.  It is important to know what the overall goal of doing this is and if you are planning on staying in your home for a short time, you would be in a position not to take out a new mortgage and stay with the one you currently have.

In fact, the reasons borrowers usually decide on refinancing their mortgage are to reduce monthly payments and interest rates as well as to have access to immediate cash.  Borrowers run the risk in when taking out this type of mortgage that actual penalties may happen as you are paying off your present mortgage with your line of home equity credit.  Before deciding on going through with this choice regarding their home, those who want to make sure they are making the right decision could be spending money on fees for an attorney.  The role of this attorney would be making sure you are getting the best deal possible, help explain the language of the loan so there are no surprises.

While Shakespeare’s quote mentioned earlier had Hamlet contemplating death and suicide, my version contemplates financial success or financial disaster.  When a homeowner contemplates if this type of a mortgage might be better than their existing mortgage, steps should be taken before diving in head first.  A borrower must make sure he/she knows what this type of a mortgage as well as when a good time to get this type of a loan is.  Also, what are the benefits and the risks involved with this type of mortgage.  So long as a borrower is confident that getting this type of loan is the profitable solution, then a homeowner can have a happier ending than Prince Hamlet did.

Another site with good information of when you should or should not refinace is here.

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