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Is it Good Idea to Refinance Your Mortgage Agreement amid the Corona Virus Pandemic?

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The coronavirus pandemic is shaking all industries on a global scale. From the bank industry to the hospitality sector, no one is safe at all during these extraordinary times. Now that numerous countries are easing their lockdowns, the “new normality” is here to stay. 

With regards to the housing market, this sector presents a wide range of predictions for its future. With property viewings and valuations taking place again, the market will soon be back on track. Some forecasts point to a fall in prices, between 5% to 15% in the short term. Many mortgage lenders are revising and adopting new measures to digitalise the mortgage process, as physical visits and agreements have been delayed or canceled, as the ‘social distancing’ measures cannot be assured. On the other hand, some of them have extended their mortgage offers for the next three months. 

Many owners are also considering upgrading their properties and home improvement loans qualify as a good option for those who do not have a good credit score but still can get an unsecured loan. This type of loan will respect your ability to cope with payments, allowing you to keep going on the works you want to carry in your property. The current lockdown situation appears as the perfect moment to rebuild a property.

Conversely, mortgage borrowers are also debating the idea of refinancing their mortgage agreements. For those who are not familiar with the term, refinancing a mortgage means paying off an existing mortgage loan, negotiating the terms, and replacing it with a new agreement. You may be thinking about this seriously for various reasons, like getting lower interest rates or changing your mortgage lender company. 

With interest rates falling, refinancing a mortgage appears as an attractive idea. It could make a difference in the short term, as monthly payments would be reduced. Although, you will need to qualify for refinancing, and therefore meet some criteria, such as: 

  • Credit score: Mortgage lenders will carefully look at your credit score. If your credit score is not healthy, you could pay higher interest rates. 
  • Home Equity: Most of the lenders will require you to have home equity between 10-20%. 
  • Income: You will also need to be on a regular income. If you do have any existing debts or late payments, you may be disregarded. Also, if you have been furloughed or laid off, your application will be negatively affected.

As discussed above, refinancing a mortgage will depend on particular circumstances. If, for example, you are considering moving to a different property in the future, refinancing might not be a good option for you. 

On the other hand, if your home equity has risen since you agreed on your initial mortgage agreement, refinancing your terms could be a good option. This process is called ‘realising equity’, and can result in some extra monthly cash for your budget.

Therefore, there is a wide range of good reasons for refinancing your mortgage at this moment.

Extending Your Mortgage Loan

In this case, extending a mortgage loan is an option that must be carefully considered. If you extend your loan payments over time, your budget will not suffer too much each month. Nonetheless, in the long term, you will have to pay more interest. At the present moment, with the uncertainty of job security, paying less money each month could be a great relief for many people. But, at the same time, your debt will grow up. If at some point you decide to sell your property, the difference on its value in comparison with the value of the loan will be notably reduced.

Reducing the Terms of a Mortgage Loan

If you have a stable economic situation, refinancing your mortgage agreement in terms of reducing your payment terms will help to build on some home equity. This means that in the short term you will have to pay some extra money, as you have decided to pay your mortgage loan faster.

If your mortgage loan can benefit from low-interest rates, you can also consider other options, such as acquiring financial assets or investing in other financial products.

Debt Consolidation

Debt consolidation is an attractive alternative in terms of saving some cash. Every debt will be reunited in the same mortgage loan (personal credit debts, credit card debts, etc.). This is a valuable option as long as the interest rate of the debt is reduced.

On the other hand, you should also consider the negative side of refinancing your mortgage loan.

Considering Selling Your Property

Refinancing the terms of your agreement might not be the best option if you are thinking of selling your property in the years to come. This is due to the several closing costs that exist when you decide to refinance your property, as these costs will be transferred to the new loan. Therefore, if you are looking to sell your house in the future, you won’t be able to sell it for the same money that it cost you. In most cases, it is best to wait until the new loan accumulates more capital, before selling the house.

As previously analysed, refinancing a mortgage can be a complex process, as it is essential to carefully consider some metrics. As the coronavirus outbreak is creating a climate of uncertainty, which is linked to high levels of volatility. Although there is a legal emptiness on the total number of refinancing that a loan can have, most of the lenders will impose limitations. Moreover, every time that you choose to refinance your loan you will have to pay for new closing costs and fees. You may also end up paying your loan for a longer time. In the current economic situation, refinancing your mortgage debt is a serious decision that needs to be deliberated.

There is not a right or wrong answer when considering if refinancing is a good or a bad idea, but it is something that depends on the personal circumstances of each person. Parameters such as job security, credit score, credit history, savings, and so on will be the key for lenders (and for borrowers) to determine if they agree on new terms. Although, if there is something that we know for sure, it is the fact that the virus has arrived to stay with us for a long time, changing the way we live.

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