Refinancing Pros and Cons

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Refinancing Pros and Cons to know

On average, the holding period before a mortgage is refinanced or the homeowner decides to move is three and half years. This is expected to go down further with the current downward trend in interest rates. In the past, experts discouraged refinancing unless the current interest rate could be cut down by at least 2%. This was because of the closing costs required to refinance at that time. With the introduction of free switch and our special promos, however, the advice is no longer applicable. We’ll try to go over all the refinancing pros and cons.

If you are considering refinancing your current mortgage, here are the advantages and disadvantages of refinancing that you may want to consider.

Refinancing Pros:
  • Improving Rates at No Cost – If your mortgage qualifies for a no fee and low penalty, and you’re not yet too far from ending the mortgage term, refinancing is a good idea as you can reduce both your interest rate and loan term.
  • Forthcoming Balloon Payments – It can be catastrophic if you need to pay a big debt and you don’t have the payment ready. You can use your home equity to convert your existing debt into one that is more manageable.
  • Having an Adjustable Rate Mortgage about to Increase – It can be a good move to convert your existing loan into a fixed rate loan on the assumption that the closing rates are not extremely high, and you have no immediate plans of selling your property or moving to a new home.
  • Tapping into Your Home Equity – While your home equity should not be used as a milking cow, especially for giddy purchases, there are valid exceptions. These include education for your kids or home improvements.
  • Having a Stressful Variable Rate Mortgage – If you are uncomfortable about an unstable adjustable rate index, refinancing may be able to provide you with some peace of mind.
Refinancing Cons:
  • Damaged Credit Rating – If you’ve had difficulty in meeting your monthly payments in the recent past, your credit score may not allow you to get the best possible rates. It may be more logical to just hold on to your current mortgage.
  • Having the Loan for a Long Time – If you are already about halfway into your mortgage loan, and a big chunk of your payments are now applied to your principal, then it may not be a wise move to refinance at this point. Refinancing may only lengthen the loan term, and may cost you more unless you choose to increase the amortization.
  • Maxed Out Credit Lines and Home Equity – If you have already squeezed out as much cash as possible from your home, you may be left with not enough equity to make refinancing a worthwhile venture. You should at least have a 20% equity to get favorable refinancing terms.
  • Imminent Pre-Payment Penalty on Existing Loan – Pre-payment penalties are usually charged at interest differential or 3-month interest, whichever is higher. Refinancing may only cost you more money in the long run.

These are some of the major refinancing pros and cons. Weigh the advantages against the disadvantages to help you determine if it is the right move for you. We believe these mortgage refinancing pros and cons which we listed will help you to make a wise decision. Contact us today to find out more about refinancing and your options.

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