Getting a mortgage refinance can be great if you want to pay off your home faster, but there are drawbacks to doing so. Before you jump into getting a mortgage refinance, consider the following reasons for and against it.
Reasons To Refinance
You could see the following benefits of refinancing your home with a new mortgage.
Lower Interest Rate
The main reason that many homeowners refinance is to take advantage of lower interest rates in the area. The interest rate is what affects your monthly payment the most, and if there has been a significant drop since you originally got your mortgage, this could translate to big savings. Refinancing is a smart decision if you recently became unemployed and need to lower your monthly expenses, or just on a tight budget and want to give yourself some breathing room.
Change To Fixed Rate
Did you originally get an ARM when you applied for the mortgage? If so, the time will eventually come where the interest rate goes up. Refinancing gives you the opportunity to switch to a fixed rate mortgage, which can give you more stability over your mortgage payment over the years. Many homeowners like the comfort of knowing exactly what their mortgage rate will be in the upcoming years for budgeting purposes.
Shorter Mortgage Term
Refinancing can help you save money by shortening the terms of your mortgage. If you started with a 30 year mortgage, you may want to switch it to a 15 year mortgage to pay off the home faster. The monthly payments will be higher, but you'll save money by paying less interest overall.
Reasons Not To Refinance
There are some drawbacks to refinancing that you may not be aware of.
While your plans to refinance may sound good right now, you may not be anticipating what could happen in the future. For instance, refinancing from a 30 to 15 year mortgage will cause the payment to be higher. If your financial situation changed in a few years and you couldn't pay that higher rate, you may face foreclosure.
The process of refinancing is not free. You will still be expected to pay fees to process the new loan, and may even be responsible to pay the costs to have your home appraised again. These fees could cut into the savings you are expected to get from a refinance.
With these 5 things in mind, you'll be able to make an informed decision about if you want to refinance.