The refinancing of the mortgage involves changing the mortgage contract, so it is possible to modify every one of the conditions of the same:
You can extend the capital of the mortgage loan
In this case, the refinancing is used to get more capital in exchange for mortgaging our property. Usually, it is an option destined to finance another type of operation different from the property’s original purchase. For example, to undertake a home reform, buy a new car, etc. Certainly, increasing the debt owed to the bank is not an ideal scenario, so we recommend you weigh all your options.
You can extend or reduce the repayment term
As a rule, the refinancing of mortgages usually takes place to extend the repayment period and thus reduce the monthly payment amount. However, if the circumstances are appropriate, nothing prevents reducing this period to finish paying the mortgage earlier than originally thought. However, the latter option can also take place through early amortization, either partial or total, which can be less expensive than refinancing in terms of fees.
You can get a lower interest rate
Suppose there is a mortgage available at a lower interest rate than the one we are currently paying. In that case, it is possible to refinance and formalize a more favorable contract in that sense. This is precisely one of the great incentives of the current mortgage market, characterized by much lower rates than in the pre-crisis real estate era.
You can modify any other condition of the mortgage
Mortgage contracts are usually characterized by the inclusion of multiple conditions, such as direct debit of payroll, contracting life and home insurance, making purchases with the card for an annual value of a certain amount, etc.
These types of conditions are known as mechanisms of connection with the bank because we are obliged to maintain a much closer relationship with the bank.
Thanks to the refinancing, the new mortgage contract could dispense with these conditions, which undoubtedly means greater freedom to do what we want with our economic resources and hire financial services wherever we want, instead of where our bank wants.
How can you refinance your mortgage most efficiently?
There are many mechanisms to proceed with the refinancing of your mortgage. Each of them has its advantages and disadvantages.
Refinancing through mortgage novation
In this case, we are proceeding to modify the mortgage contract terms with our bank.
As a rule, the main cost of this operation is the payment of the commission for mortgage novation, if that is how it has been recorded in the original contract.
The main advantage is that it is a relatively fast operation, at least, if we compare it with the other alternatives.
The main drawback is that we are only negotiating with our bank, so we are at the mercy of what is willing to consent. Therefore, the offers that other banking entities may have do not come into play.
Refinancing through mortgage subrogation
Mortgage subrogation involves moving our mortgage to another bank, replacing one of the parties to the original contract bank with another.
This operation allows the change of almost all the conditions of the contract, except for the modification of the capital of the loan or the holders.
Refinancing through early cancellation
Finally, there is always the possibility of proceeding to cancel early the current mortgage, with the capital that we have obtained by hiring a new mortgage.
It is the option that offers greater freedom, given that the new mortgage contract may have different conditions to the old one. The goal is to have more favorable conditions. The biggest drawback of this alternative is that early cancellation costs are added to the new mortgage contract.
For this reason, we must ensure that the total interest we will pay for the new mortgage is smaller and compensates for the refinancing costs.
In conclusion, the refinancing of your mortgage should be an alternative to use if the benefits obtained more than offset the costs that we must assume.
Under no circumstances should we be driven by the impulse to refinance our mortgage blinded by the idea of paying a lower interest rate, or reduced monthly fees, without first checking the impact of the total costs of the entire operation.
If the result is favorable, then refinancing is a good idea. In the opposite case, we should continue to pay our current mortgage as before and look for other alternatives to improve our financial situation.
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