Why Refinance Your Mortgage

Why Refinance Your Mortgage

by Rebecca Hall on 15 Feb, 2011

Mortgage refinance is an oft-misunderstood area of personal finance. Often referred to simply as “re-mortgaging” it has established a reputation of something to do when you’re low on finances. Although cashflow is one of the principle reasons for refinancing your mortgage, it could also simply be a way of saving you money.

What is Mortgage Refinancing?

To clarify, mortgage refinance is very similar in principle to debt consolidation loans. That is to say, if you identify that your current mortgage has become disadvantageous to you, you can take out a different mortgage to pay off the first and establish better terms. What constitutes ‘better terms’ is entirely individual to you, and depends on what it was about your first mortgage that was disadvantageous.

Why Refinance

There are three main reasons to refinance your mortgage:

•    Cashflow
•    Improved credit rating
•    Changes in interest rate

Let’s take a look at each of these in turn.

Cashflow can be improved by mortgage refinance by negotiating longer terms in your refinance mortgage. That is to say, if you’ve got £50,000 left on your mortgage with monthly payments of £1,000, you could refinance to pay off the £50,000 at a rate of £800 a month. This would of course mean you end up paying more interest in the long run, but it’s a simple way to get more money in your pocket in the short term.

If your credit rating has improved since you originally took out your mortgage, you may be able to use mortgage refinance to get better terms. The worse your credit rating, the higher deposit you would have paid, and the higher the interest you would have been charged to counter the extra risk the lender took on financing your house purchase. If your credit rating has improved (which keeping up with your mortgage payments will have helped) you should be able to obtain a more favourable interest rate.

The third most common reason to refinance your mortgage is a change in interest rate. If you took out a variable rate mortgage and are now finding interest rates sky rocketing, you may be able to find a better deal. Similarly, if you took out a fixed rate mortgage while interest rates were higher, switching to a lower interest mortgage would save you a considerable amount of money over the medium to long term.

All in, although mortgage refinancing can be a part of solving financial problems, it can also be savvy financial management.

About the Author

Rebecca Hall

Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.