If your mortgage rate is higher than the current rates banks offer, refinancing home to enjoy a lower rate may be attractive… Is it really a so good idea now?
The first thing to check for is the advance repayment penalty you will have to pay when refinancing home. This penalty fee could cancel gains you could wait for when you choose to refinance your home.
Refinancing home: advance repayment penalty
When bank gives you a mortgage loan at fixed interest rate, it matches your loan with another funding source. In other words, if you have a five years term, the money you use to fund your home may come from a term deposit of five years from another banks customer.
Bank must absolutely pay its customer at the end of the term the rate of interest originally agreed to for five years before.
Why do bank ask you a repayment penalty when refinancing home?
If interest rates fall during that period and that you choose refinancing home and break your home mortgage loan, your bank may not replace your home mortgage with another loan of the same interest rate. And bank still have to pay interest on term deposit to its customers.
How much to pay for advance repayment penalty?
Banks usually calculate the cost of advance repayment penalty in the following way: the greater of those two amounts: 90 interest days with the current rate or the difference between interest rates of your current mortgage and the new one after refinancing home.
And when interest rates are falling, the difference between interest rates you have to pay refinancing home can reach thousands of dollars!
Refinancing home: when is it beneficial?
Refinancing could be beneficial when you can take advantage of really lower rates if, in addition, you increase the amount of your new home mortgage loan.
Why? Because the new interest rate will apply for all the new mortgage amount and will be extended for the duration of the new loan. We suggest you to consult a financial planner to help you understand consequences of such an approach.
That’s all for this article. If you have any comments or experience to share, please write it right away! You will help a lot of people to get good information and avoid mistakes!
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