Published on 25 April 2016

A Beginner’s Guide to Refinancing

Refinancing a mortgage can be very rewarding or it can be a loss incurring exercise. Every financial decision or a financial product/service has potential pros and cons. You need to weigh the pros and cons in the right context and then make an informed decision.

While the entire spectrum of refinancing cannot be discussed in just one article, this beginner’s guide should shed some light on the essential aspects.

What is Refinancing?

Simply put, refinancing is opting for a new loan to replace your existing loan. You could do this with the same lender or with a different lender. Refinancing has some potential benefits. For instance, you can opt for a lower rate of interest than the one you are paying now, you could reduce your monthly instalments as a result or you can keep paying the same instalment and end up paying the entire loan sooner than with the existing loan. Also, you can save some money upfront by getting a cash payment because of the lower rate of interest while you stick to the same remaining repayment term and instalment. The objective is to save money using the lower rate of interest or a more favourable lender.

Overcoming the Issues with Refinancing!

Any financial product or service must be studied well to make informed decisions. There will be lenders, their representatives and brokers who would want to sell you the concept of refinancing. That is one way how they acquire new clients and earn commissions. You need to study the pros and cons.

There could be some upfront costs on your part, in the form of fees and commissions or processing charges. These shouldn’t deter you if you are actually making some savings every month and then eventually end up with substantial returns.

You need to factor in the short term and the long term goal. If there is a lower rate of interest, then you obviously have a bad mortgage and you should get the better rate or switch to another lender. But, if the rates have very little difference and don’t really affect the bottom line and if you are paying substantial amounts to make the switch, you have to do the math to make sense of refinancing in the short and long term.

Above all, you should always put refinancing in the right context. Would you be staying at the same home for five years or more, which is when you would realize the substantial benefits of refinancing? Do you need a better mortgage so you can sell your property immediately? These are certain contextual questions that beg consideration.

We always recommend that you consult with your YFG lending specialist to be able to make an informed decision.


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