Reasons to refinance your expensive loan in 2022

Ten years ago, the average mortgage interest rate was 4,52 percent. The interest rates significantly decreased to 1,7 percent on average in the last years. The current interest rates could benefit your situation if you took a mortgage with an interest rate of 3,7 percent for a fixed period.

Refinance lower interest rate

A rule of thumb has always been that refinancing is beneficial when the interest rate decreases by at least 2 percent. However, at this moment in time, many financial advisors recommend refinancing if you can already save 1 percent. Another approach is to look at how much time it costs to earn back the cost involved to refinance.

For example

A mortgage of 500.000 euros with a 3,8 percent interest rate has a monthly interest payment of 1.583,33 euros. When you have the same loan with an interest rate of, for example, 1,7 percent, then you reduce the monthly interest payments by 875 euros. Your new monthly interest payment becomes 708,33 euros.

Refinance to a shorter mortgage term

Another reason to refinance is that you can shorten your mortgage term without changing the monthly payments.

For example

If you took an annuity mortgage for 30 years with an interest rate of 3,8 percent, you could now refinance to an interest rate of 1,7 percent. If you feel comfortable with the monthly payments, you could shorten the duration by ten years and keep more or less the same monthly payments.

Refinance to change a fixed rate to a variable rate

A variable interest rate is an interest rate that fluctuates over time. The fluctuating rate often has lower interest rates; however, periodic changes can result in a higher interest rate over time rather than a fixed interest rate.

In this case, moving to a fixed-rate mortgage may result in a reduced interest rate. However, switching from a fixed to a variable mortgage might be a wise financial option when interest rates decrease.

To refinance or not? Do you wonder if you can save or not?

Refinancing could require investing your savings, going through the mortgage application again, paying the fine to the existing mortgage lender, and closing fees; however, the outcome over the long run can save you money.