Should You Refinance Your Home Mortgage?
It is sometimes advantageous to refinance an existing home mortgage when interest rates decline. In mortgage refinancing, a new mortgage is obtained to pay off and replace an existing mortgage. Most often it is undertaken to lower the monthly payment on the home by taking out a loan with a lower interest rate.
The example here illustrates how to determine whether refinancing your mortgage is a wise choice. The original mortgage for Rs 1.3 Crores was obtained seven years ago at an 8 percent interest rate for 30 years. The monthly payment is Rs 95,400. After seven years, the principal owed has declined to Rs 1.2 Crores. If interest rates for new mortgages have declined to 6.5 percent, the owner could take out a new mortgage at the lower rate for a monthly payment of 84,000.
Borrowing Rs 1.2 Crores for 23 years at 6.5 percent saves approximately Rs 11,400 per month (Rs 95,400 – Rs 84,000). However, refinancing may have some up-front costs, including a possible prepayment penalty on the old mortgage and closing costs for the new mortgage. The question then becomes, will these costs exceed the monthly savings gained with a lower payment?
It may also be possible to borrow more than the current balance on the existing loan, thereby utilizing some of the equity built up in the home. Borrowers refinancing for more than the amount owed should understand that rebuilding the equity to its previous level may take many years. [/responsivevoice]