Refinancing is a common tool used in the personal finance matters. This is nothing but the replacement of the existing debt obligation with a new one. The most common type of refinance is refinance home mortgage. A refinance loan is generally sought for by the borrower to pay of the old loan. This is sometimes also referred to as home equity loan. When the market rate of interest declines, the homeowners ponder over refinance mortgage as they think that it may make good business sense. Again, you may be paying on a fixed rate mortgage (FRM). And if the market rate of interest falls, you may be willing to switch to adjustable rate mortgage (ARM). The idea behind taking out a refinance home mortgage is that you can pay off the entire mortgage faster when you have better terms. However, you need to pay attention when you are opting for mortgage refinance. Anyways, there are some distinct advantages and disadvantages associated with mortgage refinancing. Here we describe the advantages and disadvantages of home mortgage refinance.
Advantages of mortgage refinancing
Reduced monthly payment
Mortgage refinance offers you the chance of a reduced monthly mortgage payment. This generates some extra money for you which you can use for some other purposes.
Invest the money
You can invest the money that has been generated as a result of reduced monthly mortgage payment, to some high-yielding investment avenues.
Shorten the amortization period
If the interest rate associated with the mortgage finance is substantially lower than the rate of interest associated with the original mortgage, you may think of shortening the term of your loan by making more than the minimum monthly mortgage payment.
Disadvantages of mortgage refinancing
Costs are involved
You are required to pay fees to obtain mortgage loans. It includes application fees, title search and title insurance fees, lender’s attorney’s review fees, loan origination fees, appraisal fees, prepayment penalty, etc. It may take a number of years to recoup the mortgage fees. In other words, it may take years for your new loan to break even. So, while opting for mortgage refinancing, consider this cost aspect too.
By rolling the costs of your original mortgage loan into a new loan, what you are doing is actually taking out a larger mortgage. It implies that your equity position is being diluted. Again, if you opt for cash out refinancing, your loan balance will actually increase. It is often seen that many of you use the cash generated from refinance to pay off unsecured debts.
Longer amortization period
You might be having the option to cut short your amortization period, but the fact is that you may not qualify for the higher payment. Again, you may not be willing to pay more so as to repay the loan faster. The common trend is that the borrower extend the loan term.
When the Federal government is lowering down the rate of interest so as to boost the economy, you may think that it would be good idea to opt for mortgage refinancing. But, there are some downsides too.