Refinancing a mortgage might work for some people, while for some, it can be an imprudent financial decision. The financial state of each individual is different, and therefore, it is important to do a thorough analysis of all the pros and cons of refinancing your mortgage. In the following paragraphs, we will take a look at the important points you should consider before taking a second mortgages.
Do a Thorough Analysis of your Financial Health
First, and foremost, it is extremely important for you to a thorough analysis of the state of your finances. You need to have a thorough understanding of what refinancing will achieve for you financially. Calculate the interest you are paying on your other debts currently, and try to get a rough estimate of how much lump sum you need to clear those debts completely. You might also have a fair estimate of the equity that you have in your home. You need to know whether cashing in on your equity will cover all your debts, or would you still end up paying a higher interest debt. You need to understand that by refinancing, you will be starting from scratch, and it will take longer for you to actually 'own' your home. Most lenders structure mortgage loans in such a way that during the initial period of your term, a major part of your payments goes towards the interest. When you have paid, say 20 years on a 30-year mortgage, the major part of your monthly payment goes towards clearing the principal amount. When you refinance, you have to start again on paying the interest first. Therefore, if you have completed a major part of your amortization period, think twice before refinancing your home.
Do a Thorough Analysis of your Financial Health
First, and foremost, it is extremely important for you to a thorough analysis of the state of your finances. You need to have a thorough understanding of what refinancing will achieve for you financially. Calculate the interest you are paying on your other debts currently, and try to get a rough estimate of how much lump sum you need to clear those debts completely. You might also have a fair estimate of the equity that you have in your home. You need to know whether cashing in on your equity will cover all your debts, or would you still end up paying a higher interest debt. You need to understand that by refinancing, you will be starting from scratch, and it will take longer for you to actually 'own' your home. Most lenders structure mortgage loans in such a way that during the initial period of your term, a major part of your payments goes towards the interest. When you have paid, say 20 years on a 30-year mortgage, the major part of your monthly payment goes towards clearing the principal amount. When you refinance, you have to start again on paying the interest first. Therefore, if you have completed a major part of your amortization period, think twice before refinancing your home.
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