Pros and Cons of Refinancing Home Mortgage Loans You Should Consider
Refinancing home mortgage loans is getting a new mortgage to pay for the existing one. The reason for people to do this is that most often, the new mortgage comes with newer terms which are usually better for you as a homeowner.
Different people have different reasons for refinancing: they may have awful interest rates and want to get better terms.
However beneficial refinancing may sound, it’s important to know both the pros and cons of it before taking out a new mortgage.
Pros of Refinancing Your Mortgage Loan
1. Low-Interest Rate
Considered as one of the reasons for refinancing, you are more likely to get a mortgage at a low interest rate. Your first mortgage may be straining you financially, and refinancing could be a great way to ease the burden.
Take, for example, your current mortgage loan may be 8% but after refinancing you get one for 6%. That’s a vast monthly difference which could help you reduce the monthly payments.
2. Shortening the Mortgage Term
Refinancing gives you a chance to get a shorter term. When interest rates are lower, as a homeowner, you have the opportunity to refinance without so much change. It is possible to cut the loan term significantly.
3. Changing from Adjustable Rate Mortgage
An adjustable-rate mortgage (ARM) is a mortgage where the interest rate varies throughout the loan term. There’s usually a fixed interest rate for a specific period then from there it changes year to year or even on a monthly basis.
For example, a 6/2 ARM signifies a fixed rate for six years and then a variable rate every year. The issue with an ARM is the fact that the variable rate could go up higher based on the index.
A fixed rate, on the other hand, is safer because it doesn’t change depending on the market conditions. If the fixed rate is significantly low, it is a better bet than the ARM as it helps you plan your repayment plan.
4. Cash-out Refinancing
Another exciting option is the cash-out refinancing. Your home’s equity is the difference between your home’s value and your loan balance.
There’s an option of borrowing against your home’s equity and refinance more than your house’s principal balance. The additional cash you get can be used to make home improvements, start a business or put the money into your children’s college fund.
One thing to note is that before you even think about refinancing, you have to ensure you have a high credit score. One way of providing that your score is good is to ensure that you can remove collection accounts on your credit report if any as this hurts it negatively.
Constant tracking of your credit report helps you know in the case that there are any errors.
Cons of Refinancing
1. The Application Process
Refinancing is an exciting process which gives you hope to lower the interest rate translating to saving money eventually. A change in income or credit from the initial mortgage could reduce the chances of getting it approved.
Most mortgage lenders will analyze your credit report and financial information. Before applying, it’s essential to find ways of improving your credit score. This could be ensuring you pay your credit card debt on time.
It is not automatic that if you have an existing mortgage that you’ll qualify for a refinance. Lenders may go to the extent of requesting your tax returns copies or recent paychecks for verification of your income.
2. Refinancing Costs
The process is not as easy as it sounds. There are costs involved when applying. Usually, when taking out a mortgage, you pay for closing costs to complete the sale. Since refinancing is like replacing the existing mortgage, you have to pay these costs again which could sum up to thousands of dollars.
There’s an application fee involved which could be as low as $75 or as high as $500 just for the application process. Note that, there are no refunds offered if the application process does not go through. There is an appraisal fee that could range between $300 and $1000, in the case that the cost is not included in the application fee.
In the case that your loan is approved, there is a loan origination fee. It covers financing and administrative costs which as one percent of the refinance loan.
So, if the refinance amount is $400,000, the origination fee will be $4,000. The lender may also require you to pay a fee for reviewing the refinancing documents before closing. This could be around $200 and $400.
Home mortgage refinance could work or not at the same time. Be sure to know all the logistics involved before leading that path. Be sure to analyze and see what other options are available.