Cons of refinancing: It may not break even. The savings may not be worth it. It could reduce the equity in your home. Your lender may disqualify you from refinancing your mortgage if you have too much debt. As such, your debt-to-income ratio must meet your lender's thresholds for you to qualify.
Having a low credit score can also prevent your application from being approved. The main benefits of refinancing your home are saving money on interest and having the opportunity to change the terms of the loan. The drawbacks include the closing costs you'll have to pay and the possibility of limited savings if you apply for a larger loan or choose a longer term. The main disadvantage of refinancing is that it costs money.
What you're doing is applying for a new mortgage to pay off your old one, so you'll have to pay most of the same closing costs you had when you first bought the home, including origination charges, title insurance, application fees, and closing charges. Getting quotes from at least three mortgage lenders can help you maximize your savings when refinancing a mortgage. Consider the long-term cost of refinancing if most of the payment you've made on your 30-year mortgage covers interests. Refinancing a mortgage usually takes as long as buying a home, with an average of 30 to 45 days.
Refinancing is a process that may seem intimidating to some people, but it doesn't have to be; in any case, it's easier than applying for the original mortgage with which you bought the home. When mortgage rates fall, borrowers are sometimes tempted to seek lower and lower rates, refinancing each time rates fall by a quarter or half a percentage point. Refinancing your 30-year mortgage would lower your monthly payment, but the long-term cost could eliminate any savings that you hope to achieve. Here's how refinancing a mortgage works, the common options available, and the advantages and disadvantages to consider.
Keep in mind that these are for situations where you refinance to lower the mortgage rate. In these situations, refinancing with cash disbursement or refinancing may have advantages to extend your term and reduce your payments. This is because refinancing a mortgage can take a long time, be expensive to close, and cause the lender to lower your credit rating. If your new mortgage rate is only half a percentage point lower than the old one, it could take 7 to 10 years to recover the costs of the refinancing.
Refinancing a short-term mortgage could increase your monthly payments and make it unaffordable for you. By comparing the repayment schedule of your current mortgage with the repayment schedule of the new mortgage, you can see the effect a refinance will have on your net worth. While refinancing a mortgage with a lower interest rate can save you money every month, be sure to consider the total cost of the loan. You can save money by refinancing for a shorter loan term or get a lower monthly payment by refinancing for a longer loan term.
