Mortgage refinancing allows a homeowner to pay off the existing mortgage by taking out another mortgage on the same property, but on better terms. As a homeowner, you may be tempted to refinance your mortgage to take advantage of a lower rate of interest. There are many advantages of a mortgage refinance, but there are shortcomings as well.
Advantages of refinancing your mortgage
You can get a lower rate of interest to make smaller payments each month, thus saving a significant amount of cash over the life of the loan. Many homeowners are taking advantage of the current low interest rate climate and taking out a home loan refinance. Those with a variable rate mortgage can also transfer to a fixed rate mortgage at the existing rates. With fixed rate mortgages, you are required to repay the same monthly amount over the loan term, without worrying about any fluctuations in interest rates, giving you stability and peace of mind.
Another advantage of a mortgage refinance is that you can shorten the loan term. But this will mean that you have to make higher monthly payments, which is fine as long as you have enough disposable income. The good news is that you can become debt free in a shorter period of time. Refinancing also gives you the opportunity to put the equity in your home to good use, such as paying for medical bills, education fees or funding a home improvement project.
A mortgage refinance can also help you meet current debt issues, such as a large credit card debt. Through a process known as debt consolidation, you can combine all your high interest credit card debt into a single mortgage repayment at a lower rate. Only one monthly payment is necessary, eliminating the hassles of paying different bills and different lenders. You can also plan your monthly budget and finances better.
Disadvantages of refinancing your mortgage
The high cost of refinancing is its biggest disadvantage. Normally you have to pay the lender's fee for underwriting and processing the loan. Add to this a potential lawyer's fee, appraisal fee, survey fees (for an updated survey), and you could be shelling out thousands of dollars, possibly offsetting the savings you make from the lower monthly payments. However, by shopping around, you may find lenders willing to incentivise you to move and to pay these costs for you.
There may be penalties associated with entering a mortgage refinance before the existing agreement has ended. If you are in a hurry to refinance, remember that you may have to pay a prepayment penalty to the existing lender.
The refinancing process may not be as simple and convenient as you imagine it to be, even if you are dealing with your current lender. Qualifying for one can be a bit tough if you have a poor credit rating and unstable income. You also need to have maintained a good business relationship with your lender and made all payments on your existing mortgage on time.
Weigh all options before taking the plunge and make sure you contact us prior to the change to ensure you have considered all of the advantages and disadvantages of a refinance.