The Pro's and Cons of Refinancing your Mortgage

Should I refinance?

Mortgage refinancing is a powerful tool for home owners, it can allow you to take advantage of a wide range of options that may not have been available when you took out the mortgage initally, but likelwise it can also be an expensive and stressful exercise if it's not done correctly, or at  the wrong time.

Owning a home that is secured by a mortgage loan can be an exciting experience. An individual gets to have a place to live and a bank makes money off of the mortgage loan. However, many individuals who took out their home mortgage several years ago did so at much higher interest rates. Some mortgages may have been at 6-8%! The great difference between interest rates is one of the reasons that individuals begin to weigh the pros and cons of refinancing a mortgage.

 

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One of the positive reasons to refinance a mortgage is that it can lower the monthly payment of the mortgage. Depending upon the exact mortgage rate and the length of the mortgage, the possibility may exist to save tens of thousands of dollars. There are some charges that are associated with refinancing. Points are required in most mortgage situations. Think of points as a version of a down payment. Lenders typically require one to two points in a refinancing situation.

No closing cost loans are a great reason to refinance. They have no points and are typically only available to borrowers whose current rate is 1.5% or more above what their refinanced rate would become. While a no closing cost loan may seem like a great refinancing option, banks typically are not offering the borrower the lowest possible rate. They simply lower the rate to where the borrower believes they are getting the best deal.
When an individual is refinancing their mortgage, it may temporarily effect their credit score. There may be several “hard” credit inquiries placed against the borrowers credit report. These inquiries will remain on the credit report for a period of two years. It is normal to have several of these during the search for a refinance but be aware that if you have bad or poor credit, this can be another negative effect of a refinance.


Closing costs are another financial issue that occur when a mortgage is refinanced. The complete cost of modifying an existing loan can be as much as four to seven percent. The exact amount that an individual will pay in closing costs, points, lender fees and other costs will vary based upon lender policy, mortgage balance and other factors. It is extremely important to sit down and calculate the amount of money that will be saved from refinancing the mortgage using each rate quote that you are given. Factor in all of the costs to ensure that you will still be experiencing a significant cost savings.

Some individuals take advantage of their home equity to take out a larger new mortgage than the exisiting balance on their home. This is a risky solution to a short term cash shortage. While a home equity line of credit can be useful to a homeowner, it may be better to keep it seperate from your home mortgage. First, it may be possible to secure a different rate. Second, the payment will be smaller and more managable than a single larger mortgage payment.

Mortgage refinancing can be a great solution for homeowners who are paying outrageous monthly mortgage payments. However, it is important to calculate the cost savings and weigh the pros and cons. Due diligence will ensure that the refinancing process goes smoothly.

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