It’s Important To Understand The Pros And Cons Of Refinancing A Mortgage.
Are you thinking about refinancing a mortgage? It’s a big financial decision to make, so it is important that you understand its short, and long-term impact. Before we review the pros and cons of refinancing a mortgage, here’s a quick recap of how it works.
- Define your goal. Why are you refinancing?
- Talk to your current lender. Ask about your refinance mortgage options. In most cases, they would want to try and keep you as a client. Use this as leverage to get a better deal.
- Shop and compare rates. Don’t get blinded by lower rates. Read the fine print. Consider the upfront fees. Once you have a shortlist, ask for a loan estimate. This allows you to compare in detail. It helps to set a meeting so you can assess a lender’s credibility. This is also your opportunity to ask refinance mortgage questions specific to your situation.
- Check if interest rate applies to the life of the loan. Some rates are only available for a set period. Afterward, it reverts to a higher rate and you may end up paying more.
- Apply within a short period. Bulk applications can affect your credit score.
- Lock the rate you agreed upon. Interest rates are always changing. Make sure you get the rate you agreed to.
So, What Are The Pros And Cons Of Refinancing A Mortgage?
Pros of Refinancing
The most obvious advantage of refinancing a home mortgage is getting a lower interest rate. You may have to pay an upfront fee. However, what you’re getting is the chance to pay less each month. This frees up your budget for other financial goals like short-term savings or an emergency fund.
If you can now afford to, refinancing also allows you to finish paying your mortgage debt in a shorter period. If you are switching from adjustable to fixed interest rate, you can avoid ‘surprises’ that lead to a sudden surge in payments.
Refinancing a mortgage lets you access your home equity. Home equity is the difference between your home’s market value and what you still need to pay off. Accessing your equity means you can get cash for major expenses like tuition fees or hospital bills.
Cons of Refinancing A Mortgage
If you are too far in your mortgage, refinancing may not always be a good idea. You may end up paying more monthly, even if you get a lower interest. In the early stages, your payments hardly make a dent on the principal amount. Therefore, it makes sense to consider refinancing.
But if, for example, you are on year 15 of a 20- or 30-year mortgage, refinancing now may not be a good deal. A great and simple way to find out is to use a mortgage refinancing calculator.
Refinancing comes with certain risks that you can weigh beforehand. For instance, is your refinanced mortgage a recourse product? This means that if you default on payments, the lender can seize your assets. Another thing to check is if there’s a prepayment penalty for your original mortgage.
Still on the fence about refinancing? We can help you. Our mission is to help you achieve your goals through smart refinancing. And we do this by empowering you with the knowledge to make an informed decision.
Not sure how to use a mortgage calculator? We’ll break it down for you. Call us now and let’s see how we can help.