Refinance Your Mortgage and Save Money

By Ada Denis

If your lack of savings has you concerned, a mortgage refinance might be the answer. With the right refinance package, you can consolidate debts, lower your monthly mortgage payments or pay off your mortgage faster.

What's Involved in a Refinance?

With a mortgage refinance, you pay off your existing mortgage and take out a new mortgage at a lower interest rate.

Some financial experts advise that before refinancing you make sure that the equity in your home is at least 5% of the home's value, if your mortgage is insured. If your mortgage is not insured, your equity should be more than 20% of your home's value. Equity is the current value of your home, minus the amount outstanding on your mortgage. How do you figure out the equity? Here's an example:

* Ten years ago you bought a house for $250,000, with $12,500 down. You have paid $15,000 of the mortgage, leaving you a balance of $222,500 owing. Your equity would be $250,000 - $222,500 = $27,500. But the value of your home has increased to $300,000. So the equity is actually higher. Factoring in the advice above, with an insured mortgage you could access 95% of the home's value, meaning your equity is $285,000 (95% of home's value) - $222,500 (current mortgage balance) = $62,500. For a conventional, uninsured mortgage where you can access 80% of the home's value, the amount of equity would be $240,000 - $222,500 = $17,500.

* Once you have determined the equity you have in your home, you can start to discuss your refinance options with your mortgage professional. The examples above use standard, conservative figures. Keep in mind that many mortgage brokers can secure refinancing at levels higher than 95% loan-to-value (LTV).

* You should also note that a cash-out mortgage refinance enables you to take out more than you currently owe on your mortgage and use it for other expenses. You can put the extra funds towards paying off debts, financing home renovations or paying part of your children's tuition.

Refinancing as a Savings Strategy

Refinancing can save you money by consolidating debts, but it can also help in other ways, when the economic conditions are right:

* When interest rates drop and you are planning to stay in your home a long time, refinancing to obtain a lower rate can help decrease your monthly payments. To consider this strategy, ensure that the interest rate you are currently paying is at least 2% higher than the market rate.

* Change to a shorter amortization to pay off your mortgage faster.

* In times when interest rates are fairly stable you can refinance to change your mortgage from fixed to variable, or vice versa. Talk to your mortgage professional to ensure you are getting the best rate.

Before deciding on a mortgage refinance, read the fine print on your current mortgage. There may be fees for repaying early. Also factor in the fees that you will be charged for your new mortgage. They are often the same as the fees charged for your original mortgage - legal fees, title search, application fees and so on.

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