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When should you consider refinancing your mortgage?

A mortgage is a long-term financial commitment, but there is always some wiggle room if your circumstances change and you want a new deal to match. You usually have some flexibility when it comes to renegotiating your mortgage terms, either with your current lender or by moving to another.

This is done by taking out a new, improved mortgage loan to pay off the old one, in a process called refinancing. If it’s approached carefully and with a solid aim in mind, it can leave you in a much better financial situation.

Which kinds of refinancing are available?

In theory, any aspect of your mortgage can be renegotiated. Do you want to spread your payments over longer to reduce monthly costs? Or secure a lower interest rate to make your deal more competitive? Or even switch from a fixed-rate deal to a variable one or vice versa? All of these are possible with the right refinancing deal.

And lastly, if your home has a large amount of equity (which is when it’s worth a lot more than you owe on it), then you can use refinancing to release this value in a lump sum to spend how you want.

Pros and cons of refinancing

The benefits of refinancing include saving money each month, usually simplifying your financial situation in the process.

However, there are costs involved. You’ll need to pay legal fees, mortgage registration fees, possible early repayment penalties, and more.

These costs can usually be folded into your new loan so you pay nothing up front, but even so, refinancing can work out to be an expensive process. It’s important to check that your potential savings or other benefits outweigh the expense.

When you should consider refinancing

There are many occasions when refinancing could be a worthwhile idea, including:

  • When better rates are available, saving you at least half a percentage point and preferably more on your current deal.
  • If your credit rating has improved, or your home equity has increased, giving you the status to get a better deal.
  • If you have equity in your home which you could release to pay off other debts, for example moving your expensive credit card debt to a low mortgage rate.
  • If you want to access your home’s equity to affordably fund improvements or other major expenses.
  • If you bought your home with a low down payment and needed to take out mandatory mortgage insurance, but now have enough equity to avoid this.

But whatever your ultimate aim for refinancing, there are two vital points to bear in mind.

Two things to consider

First, the loan will be secured on your home, risking repossession if you don’t keep up repayments. Taking on any extra debt through refinancing should be considered very carefully indeed.

And second, refinancing usually only works if you’re planning to stay in your home for several years. Otherwise, the fees will cancel out any savings you make.

In the right circumstances, refinancing can be a useful tool. However, it’s just as big a commitment as taking out your original mortgage, so fully think through all the implications before going ahead.

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