Comparison of refinancing and mortgage overpayment options

The decision to optimize the costs associated with a mortgage loan is an important step on the path to financial stability. In this context, property owners often face a dilemma: which is a better solution – refinancing the loan or overpaying it? In this post, we will look at both options, their advantages, disadvantages and conditions, to help you make an informed decision.

Mortgage refinancing

Refinancing involves taking out a new loan to pay off the current one. This option is often considered when market interest rates are lower than when the original loan was taken out.

Advantages:

• Possibility of obtaining lower interest rates and therefore smaller installments.
• Option to change the type of interest rate (from variable to fixed and vice versa).
• Possibility to consolidate other debts.

Disadvantages:

• Additional costs related to the initiation of a new loan.
• Credit re-evaluation requirement.
• Potentially longer repayment period.

Mortgage overpayment

Overpayment of a loan involves repaying a higher amount than required by regular installments, which results in a faster reduction of debt capital.

Advantages:

• Reduce principal and total interest payable faster.
• Shorter loan repayment time and faster achievement of financial freedom.
• Greater flexibility – you can overpay according to your own possibilities..

Disadvantages:

• The need to have additional funds for the overpayment.
• Possible early repayment fees.
• There is no guarantee that the overpaid funds would bring a higher return if invested.

How to make a choice?

Choosing between refinancing and overpaying depends on many factors, such as current interest rates, your financial situation, goals, and liquidity and risk preferences. Consider the following:

• What are current interest rates compared to your current loan?
• What are your long-term financial goals?
• Would you rather have a smaller monthly budget or achieve debt freedom faster?

Summary

Both refinancing and mortgage overpayment have their benefits and potential pitfalls. The key is to carefully consider both options and choose the one that best suits your personal and financial goals. Consulting a financial advisor can also help you make the best decision.