5 Reasons to Avoid Refinancing Your Mortgage

Avoid Refinancing Your Mortgage

Even when mortgage rates are low and friends and colleagues are comparing who got the best interest rate, refinancing is not always the wisest option. This is due to the fact that refinancing a mortgage can be time-consuming, costly at closing, and will need the lender to pull your credit score.

While switching to a mortgage with a lower interest rate can result in monthly savings, it's important to consider the whole cost of the loan. If, for example, you have 10 years left on your existing loan and decide to extend the payments into a new 30-year loan, you would wind up paying more in interest overall to borrow the money and be saddled with 20 additional years of mortgage payments.

As a homeowner, you must perform a crucial calculation to ascertain the cost of a refinance and the amount of money you will save each month. Despite having lower monthly payments, you are not saving any money if it will take three years to recuperate the costs of the refinance and you want to move in two years. An excellent tool for determining potential monthly payments is a mortgage calculator.

Even when the stock market is not volatile, this is not a good strategy in general. The issue with cash is that it is just too easy to blow. This can be a fantastic alternative if you are diligent and will use the excess money to invest or build your emergency reserve. Paying off a mortgage at 4% per year, on the other hand, may be a better value than putting your money in a CD that earns 2% per year.

In general, lowering your interest rate to lower your monthly payments makes financial sense. However, don't overlook the fees of refinancing. In addition to the closing expenses and fees, which can vary from 2% to 3% of your home loan, extending your loan terms will result in higher mortgage payments.

There is no such thing as a "no-cost" mortgage loan, so be wary of such an offer. When refinancing, there are numerous ways to pay for closing charges and fees, but the fees are always paid in some form. In other words, homeowners can pay for a refinance with cash from their bank account, or they can roll the charges into their loan and raise the size of their principle.

While there are no laws limiting how frequently you can refinance your property, lenders typically impose their own limits. Some lenders also charge prepayment fees on existing loans.

Refinancing a mortgage can be a prudent financial option for many homeowners, especially if they require more than mortgage relief can supply; nevertheless, not every refinance is appropriate. Before making a decision, make sure to weigh all of your possibilities.