Many people these days break their current mortgage ignoring the financial penalty involved so that they can get more favorable interest rate which saves a huge amount of money for their whole life. Today we will focus on all possible pros and cons of refinancing mortgage here. Please feel free to comment if you have any queries!
Below listed are some pros and cons of refinancing mortgage that needs to be focused before taking it:
Pros of refinancing mortgage:
- Cheap loans
Refinancing historically lowers the interest rate which ultimately lowers the monthly mortgage payments because of which people are able to save thousands. Hence, refinancing is taken as the better option for people wanting to as much as a few dollars.
- Improved loan period
With the lower rates, you are also allowed to shorten the length mortgage loan period. With the low rates, the monthly payment is also lowered as well as a shortened length of your loan saves dollars from the interest.
- More advantage
These days there are many loan providers who offer low rates right now which provide you with much more negotiating power for a better deal from the lenders. Better to refinance from the lenders who have a low-interest rate and include no penalty for paying it off early.
- No more adjustable rate mortgages
Refinancing further has an option of switching from adjustable rate mortgages to fixed-rate loans which an advantage as they don’t need to increase the interest payment when the rate goes up in the market as the rate stays same for the entire life.
- Loan mergers
Refinancing allows you to consolidate a second mortgage which can generally save money as it makes you pay one low rate on the entire amount instead of a low percentage on the primary mortgage.
- Cash in your pocket
With equity inside the house, the refinanced loan can be used to cash out that equity. This money from this process can be used to pay off other more expensive debt, such as credit cards or invest it in a start-up business. But don’t misuse it leading up to the financial crisis.
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Cons of refinancing mortgage:
- Lower Rates
Even with the lower rates, the cost of refinancing can drastically affect the savings you’ll get a monthly payment with your new loan. Be careful with the refinancing fees to make sure your savings will pay back those costs in a due time.
- Financial risk
Some states give a “non-recourse” loan then the bank can shut down your house but can’t come after your other assets. However, refinanced mortgage loans usually shut down the house, sell it and still if it doesn’t cover your loan amount, then the bank can seize other assets.
- Little people qualify
These days since banks are being more selective because of the lending problems, refinancing requires an average credit score to qualify for the loan. And if your credit is not enough then you may be able to start the refinancing process but can get rejected once banks check their scores.
Your loan may include a penalty for paying it off early, which includes refinancing it. Better to settle down with the lenders in the deal. And if you’re refinancing with the same lender, try to abandon the penalty as much as possible.
- Less mobility
In refinancing, there may be some situations in which you will have to stay in your house for many months to recover the fees you paid to get the lower monthly rate.
- Many Paperwork
To get everything at a lower rate, you need to go through a very lengthy loan application process that allows for a complete review of your finances and employment history, which also may include income tax returns, pay stubs, investment and loan statements, and also savings account balances.