Mortgage Refinancing 101
If you’re considering refinancing your home mortgage, you’re not alone. In fact, in 2012 refinance applications jumped to the highest level in more than three years. The are many factors that may influence your desire to refinance your mortgage. Since your home is one of your most valuable assets, it’s important to make sure you know the pros and cons of a refi.
Pros to Refinancing
Lower Your Interest Rates – There are many factors that determine your interest rate when you apply for a loan. Over the years, these factors can change. If market conditions or your credit score have changed in a positive direction, you may be eligible for a lower interest rate loan. This in turn would reduce not only your monthly payments, but your overall loan payment amount.
Changing Length of Mortgage – Refinancing can offer you the ability to change the length of your loan. You may want to increase the term in order to reduce monthly payments, or you may want to reduce the term to decrease interest payments both short and long-term.
Changing Loan Type – If your home loan is currently an adjustable rate mortgage, you may want consider a fixed-rate mortgage for more security and stability. This might be especially applicable if you believe interest rates might go up in the future. Even if you don’t want to change from an ARM to a fixed-rate loan, you may still be able to negotiate a better ARM loan through a refinance.
Home Equity – If you have equity built up in your home, a refinance is a good opportunity to be able to access this as cash. If you refinance for an amount greater than you owe on your home, you get the difference in a cash payment. While you may get a nice lump sump, keep in mind that you will need to take time to build the equity back up again.
Cons to Refinancing
Amortization – With a home loan, the longer you own your home the more your monthly payment is actually being applied to your loan amount and not interest. If you’ve owned your home for quite some time, most of your monthly payments are more than likely being applied directly to your loan amount with very little going to interest, in comparison. Refinancing would start the amortization process over from the beginning and your new payments would be applied mostly toward the interest as opposed to reducing the actual loan debt.
Penalties – Some mortgages have repayment penalties. When you refinance your home, you are actually paying off your current loan in full and taking out an entirely new loan instead. This act would trigger any early payment penalties attached to your current loan.
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