3 Disadvantages of Mortgage Refinancing, and When It’s Worth It
Is there a downside to refinancing?
Refinancing involves replacing your existing mortgage with a new one. This can lower your interest rate and monthly payment, and potentially save you thousands of dollars.
But while refinancing has its benefits, it’s not the right choice for everyone. A refinance starts your loan over again. And there are also closing costs to consider.
Some people just focus on the new rate and the new payment. However, for refinancing to make sense, you need to take the big picture and make sure that you will be saving over the long term, not just month to month.
Check your refinancing eligibility (September 7, 2021)
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Three things to know before you refinance
In addition to getting a lower rate and monthly payment, other common reasons to refinance a mortgage can include changing your loan program or product, cashing out the equity in your home, or removing the name. from someone’s loan.
But even if you have a good reason to refinance, make sure you understand how it works. There are a few drawbacks inherent in refinancing that will impact your decision.
Hee is what you should know.
1. Refinancing restarts your loan
Since the refinance replaces your current mortgage with a new one, it starts the loan over again. And in many cases, borrowers reset the clock with another 30-year term.
Starting a new 30-year loan term can offer the biggest monthly savings. Still, it’s not always the smartest decision, depending on how many years are left on your current mortgage.
If you’ve been on the original loan for five, 10, or even 15 years, starting over with a new 30-year mortgage means you’ll be paying interest on the house for a total of 35 to 45 years. This could increase the total amount of interest you pay over the life of the loan, even if your monthly payments go down.
Of course, this does not always happen.
Some people receive a repayment date similar to their original loan. For this to happen, you need to refinance for a shorter term.
Let’s say you already had the original mortgage for five years. Instead of another 30 year mortgage, you can refinance into a 15 or 20 year mortgage. Or, if you’ve had the original loan for 20 years, you can refinance to a 10-year mortgage.
Just be aware that shorter term loans almost always have higher monthly payments. This is because you have to repay the same loan amount within a shorter period of time.
But, as long as your new interest rate is low enough, you should see significant overall savings with a shorter loan term.
Check your eligibility for refinancing. Start here (September 7, 2021)
2. Refinancing costs money
Do you remember paying the closing costs when you bought your home?
Unfortunately, refinancing also involves closing costs. These vary, but are usually between 2% and 5% of the loan amount. Closing costs are due at closing and may include:
- The origination fees of the lender
- A new evaluation of the house
- Registration fees
- Discount points
- Prepaid taxes and home insurance
- And more
Generally speaking, refinancing only makes sense when your savings exceed your closing costs. This is the “breakeven point”.
For example, let’s say refinancing reduces your monthly payment by $ 300 per month and you paid $ 6,000 in closing costs. You must hold the new mortgage for at least 20 months to break even.
The good news is that you can often build closing costs into your mortgage to avoid paying up front, but only if you have enough equity.
Some lenders even offer zero-closing refinancing, where you pay nothing (or very little) out of pocket.
The lender gives you credit for your costs, but it’s not technically free. In exchange for refinancing with no closing costs, you’ll likely pay a higher mortgage rate.
3. You could pay more in the long run
Yes, refinancing can give you immediate monthly savings by reducing your mortgage payments. But he does not always offer long term savings.
For example, if you are almost done paying off a 30-year loan and start over with a new 30-year term, you will pay a lot more interest in the long term.
And your new interest rate and the length of your loan aren’t the only factors influencing the overall cost. The amount your new mortgage also plays a role.
Another common reason to replace a mortgage is cash refinancing. It involves borrowing money from your equity for home improvements, debt consolidation, and other purposes. In this case, your new mortgage balance will exceed what you currently owe.
Now, if you start over with a new 30-year term and a lower rate, even with a larger balance, you could save monthly. But you will pay more in the long run, not only because you borrowed more, but also because you extended the overall term of the loan.
Before you apply, use a refinance calculator to estimate your savings and costs.
You can avoid paying more by not touching your equity and keeping your new repayment date similar to the original one.
Sometimes, however, paying more is the lesser of two evils.
The bottom line is that refinancing can provide wiggle room in your budget and free up money for other purposes. So if you’re having trouble paying your current mortgage payment or meeting other financial goals, the immediate savings could keep your head above water.
Check your eligibility for refinancing. Start here (September 7, 2021)
When Is It A Bad Idea To Refinance?
In summary, refinancing is not always a good idea, even if you can get a lower mortgage rate.
Here is a look at when he maybe not makes sense to refinance a mortgage.
- You won’t keep the mortgage long enough to break even
- You can’t get a lower interest rate
- You have issues with your credit rating or credit history and you cannot qualify
- You are about to pay off the original mortgage
- You will pay a lot more in the long run
- You can’t afford the closing costs
- You cash in your equity for the wrong reasons (vacation, shopping, etc.)
Remember that refinancing must have a net financial benefit. If mortgage refinancing doesn’t improve your financial situation in one way or another, it’s probably not worth it.
When is it worth refinancing?
Despite the inherent drawbacks – for example, having to restart your loan – refinancing is often worth it. Especially at today’s near record interest rates, millions of homeowners could save on their housing costs.
Here are some scenarios where it often makes sense to refinance.
- You can reduce your monthly mortgage payments
- Your new rate is 1% or more lower than your current rate
- Your credit profile has improved and you can get a lower rate loan
- You want to switch from a mortgage at an adjustable rate to a mortgage at a fixed rate
- You want to switch to another loan program (for example, from an FHA loan to a classic loan without PMI)
- You plan to hold the mortgage long enough to break even with your closing costs
- You can pay closing costs up front
- You want to eliminate FHA or USDA mortgage insurance
- You wish to decrease or increase the duration of the loan
- You want to leverage the equity in your home
- You remove a name from the mortgage
There are many ways that mortgage refinancing can benefit you. In addition to saving you money each month, refinancing could help you consolidate debt, pay for home renovations, pay off your home sooner, and more.
If you’re unsure, talk to a mortgage advisor or loan officer who can help you explore your lending options and decide if refinancing is worth it.
The bottom line: should you refinance?
Refinancing can lower your mortgage rate, lower monthly payment, and provide you with cash from your equity. Just make sure you consider the big picture before you apply.
You need to factor in the savings as well as the costs of refinancing, both short and long term.
- How long will it take to achieve equilibrium?
- How long do you plan to live in the house?
- How long is the new mortgage?
- Overall will you pay more or less interest?
As long as you calculate the numbers beforehand, refinancing can be a great decision. Many homeowners save thousands, if not tens of thousands, by refinancing at a lower rate.
Check your new rate (Sep 7, 2021)