Pros and Cons of Refinancing

Pros and Cons of Refinancing

Refinancing is generally done to get a lower mortgage payment with reduced interest rates so as to save money. If you own your home, but if you think you can get a better mortgage loan then you can decide whether to refinance or not.  Before taking the decision, you must understand all aspects of the pros and cons it may bring towards you when refinancing.

Below are the Pros and Cons of Refinancing:

Pros and Cons of refinancing

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Pros of refinancing:

Refinancing is very popular these that as it comes with a number of advantages especially with low rates:

  1. Lower payments

With the falling interest rates, the basic argument is the prospect of lower monthly mortgage payments. People are able to save thousands of dollars because of the loan with a lower interest rate. Refinancing is the better option for people hoping to save as much as a few hundred dollars.

  1. Cash in your pocket.

With equity in your house, you can use a refinanced loan to cash out that equity. This process can prove to be useful if you use the money 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.

  1. Fixed rates

Refinancing allows people to move from an adjustable rate mortgages (ARMs) to fixed-rate loans. It is an advantage for people who don’t save on their monthly payment immediately. True that if you move to a fixed rate, the payment can get a bit higher, but you will be able to adjust in that rate because by historical standards the rate go much higher over the course of a 30- or even 15-year ARM loan.

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  1. Freedom to choose

Whenever you are ready to finance for a home purchase, some pressure may show up to get the deal done quickly. When you’re refinancing, there is very less urgency, and enough to shop around.

  1. Loan mergers

Refinancing also allows people amalgamate a home equity loan with your home contract that can actually save your money by allowing you to pay one low rate on the entire amount.

Cons of Refinancing:

Refinancing can generally have a potential impact on your debt and taxes.

  1. Expenses

Starting from a very small loan, the fees become a more significant consideration, because the banks take a larger percentage of the loan than the people refinancing a larger loan. It’s also very costly in terms of the time as many paperwork are involved that includes all the housing crash, and many documentation to show how much money you make and how much you have in the bank.

  1. Prepayment penalties

The loan you take may include a penalty for paying it off early that includes refinancing it. So, the costs of any penalty should be included when calculating the time it will take you to break. Hence, if you are thinking of refinancing with the same lender, try to abandon the penalty.

  1. Less mobility

Once you refinance, there may arise a situation in which you may to stay in your house for few years to recover the fees you paid to get the lower monthly rate. Or else you may lose money on the deal.

  1. Financial risk

In some states if your mortgage is a “non-recourse” loan then the bank can shut down your house but can’t come after your other assets. However, refinanced mortgage loans are usually “recourse” products where the back can shut down the house, sale it and still if it doesn’t cover your loan amount, then the bank can seize other assets.

  1. Very less people qualify

Banks are more selective because of the lending problems that caused the housing crash. People with even average credit scores are able to start the refinancing process but can get rejected once banks check their scores.

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