Two sides of the coin of refinancing
The majority of people refinance their mortgage because they are being squeezed by the current loan terms. But there are other reasons for looking seriously at a refinancing strategy. The point of refinancing is to renegotiate what you pay. When you first took out your mortgage, you had a poor paying job. But that’s all changed. It’s important to note the need to negotiate with your lender. Lenders tend to get upset if you try to change the terms of your loan without consultation, even if your motives are pure. Let’s take an example of your life as a story of success.
Secondly, what is affordable now must still be affordable in one or two years. Are you sufficiently certain that your circumstances are going to stay successful? Look around. There may be a recession coming. You will pay fees to change the term of the loan. The other increasingly common reason for renegotiation is to avoid a mortgage adjustment. During the last few years of the housing bubble, many buyers were sold on an adjustable rate mortgage. The idea is simple.
You have a low starting interest rate but, at the end of the “holiday” period, the rate is reset or adjusted to a higher rate. All these contracts have a fixed period so everyone knows when the higher rate will hit, but not everyone knows what the new rate will be. Most contracts use the prevailing rate on a particular day + an agreed mark-up.
If the new mortgage rate was going to be too high, homeowners could sell to realize their capital gain and buy another home on an adjustable rate mortgage. Except the bubble has burst and house prices are dropping so owners are caught with no capital gain and increasing monthly instalments.
