Pros and Cons of Refinancing
With interest rates at an all time low, there has been a lot of buzz around refinancing to reduce interest rates and save money. Before you run to a lender to refinance your home, it is good to review the pros and cons of refinancing. To start, refinancing is when you replace your old mortgage with a new mortgage. When you refinance, your existing mortgage loan is paid off and a second mortgage loan is created. Most banks or lenders will require you to maintain your original mortgage for at least 12 months before refinancing. However, every loan contract is different. With that said, here are the pros and cons of refinancing your home.
Lower interest rates – one of the main reasons to refinance, lower interest rates can result in an enormous amount of savings.
Change the loan period – Shortening or lengthening the loan may be beneficial based on your financial situation.
Leverage – Since many loan providers are offering low rates, you can use the competition to your advantage when negotiating.
End adjustable rate mortgages – Switch from an adjustable rate mortgage to a fixed rate mortgage to eliminate the risk of your rate increasing in the future.
Loan mergers – Refinancing allows you to consolidate a home equity loan or second mortgage into one mortgage loan at a low interest rate which could save you money if you have a high interest rate loan.
Extra cash – If you have equity in your house, you can perform a cash-out refinance to acquire extra money for things like a home renovation.
Refinancing fees – loan origination fees, loan discount points, & private mortgage insurance are fees that can offset the savings of the lower interest rates. Consult the refinance calculator below to find your break even point.
Difficulty qualifying – Depending upon your credit score, lenders can be selective when refinancing making it difficult for some people.
Prepayment penalties – Your original mortgage loan might include a prepayment penalty clause that penalizes you for paying the loan off early.
Less mobility – When you refinance, it is not an instant savings as there are several upfront costs explained above. Thus, it will take a few years to break even and start saving so it would not be smart to move before that happens. Use the refi calculator below to determine that break even point.
Paperwork – Refinancing is not a simple process. You will have to fill out tons of paperwork. However, refinancing with the same lender should quicken the loan application process.
All in all, refinancing your mortgage loan is definitely something worth looking into due to the current low interest rates. However, as you have learned from this post, it is not always the best decision. The best thing to do is to play around with the refinance calculator first before consulting a lending adviser. For more real estate tips, check out the live section of our website.