Those who acquired their homes when the federal funds rate was 1.5% higher than that of today are currently presented with a jackpot. Sadly, not many are aware of the golden opportunity of profiting from low-interest rates. To say the least, many homeowners in this category have passed by this opportunity without realizing what a treasure they are missing – refinancing your mortgage loans.
Homeowners who purchased their homes when the federal funds were at least 1.5% higher than that of present-day have the opportunity to benefit from current low-interest rates by refinancing their mortgage loans, unlike several other homeowners. However, it is generally advised never to swim in unfamiliar waters, which is applicable for all loan operations. The question of “should you consider refinancing your mortgage loan could be a very tricky one.
Before deciding, it is smart to understand both sides of the decision you are about to make. Understanding the upsides and downsides, including the negative impact it could pose on your personal finance will help you make firm decision in the face of any discouragement. It is until then that you need to bother yourself about when to refinance, and how to go about it.
Pros of Refinancing your Mortgage Loan
It is your best option at reducing your monthly payments
Here is a simple one. When you refinance a higher-rate mortgage loan into a lower-rate one, while keeping an equivalent term, you get the opportunity to lower your due monthly payments. Unfortunately, if you are unable to secure a lower-rate loan, then you can apply for a longer-term mortgage loan while spreading your payments over a longer time. This longer time frame allows you to pay reduced monthly payments.
Reduction of Lifetime interest cost
One of the most common reasons why many homeowners refinance their mortgage loans is the opportunity to reduce lifetime interest cost alongside the sum total borrowing costs. Although this largely depends on the type, structure, rate, and term of your original mortgage loan, the refinance process is known to reduce total interest expense in many ways. Some of the several ways include; lowering the interest rate, converting from adjustable rate to fixed rate, and shortening the term.
Increment in loan predictability
Not every mortgage loan has a fixed rate, so predictability isn’t a concern for everyone. There are yearly variations on the escrow side when your property taxes and insurance vary irregularly, though your principal and interest remain fixed for the time frame of the mortgage loan. However, if the original mortgage loan isn’t fixed and adjustable, refinancing is the best way to solve predictability problem.
A reduced cost option of tapping the equity in your home
Refinancing your mortgage loan gives you the alternative of cash out refinance rather than a home equity loan. Cash out refinance loan is secured and acquired by the mortgage value of the home itself, which reduces risk for lenders with rates lower than that of credit cards and most unsecured personal loans. With this low-cost capital, you can consolidate higher-interest debt, pay college bills, finance home improvements, and settle health bills.
Elimination of mortgage insurance
FHA loans are known to unload a huge cost on home buyers, which can last for at least 10 years or in severe cases a lifetime. Refinancing your mortgage loans could put a stop to its annual mortgage insurance premium even long before schedule. All you need to do is to wait patiently till you accumulate 20% equity on your home, which shouldn’t take 10 years.
Cons of Refinancing your mortgage Loans
Stressful Application Process
Refinancing your mortgage loans isn’t the most stressful loan application process, however, it one of the most tedious and time-consuming forms of the loan application. Refinancing your mortgage loans require the submission of several pieces of documentation proving your income statement, identity, and employment status. Unless you are ready to see it to the end, this is not an application to joke with. Learn how the refinancing process works in this article.
Break-even guarantee doesn’t exist
Many homeowners have been disappointed when they think their new loans will cost less than their original loans. It doesn’t always work out as you may think, you may have to end up selling your home before you break even.
No guaranteed Approval
Unfortunately for many homeowners, they are not entitled to refinancing their mortgage loans. Deterioration in your profile could lead to an application outright refusal. This deterioration could come as a result of poor credit score, low income, job loss, or even a higher debt-to-income ratio. These unfortunate reasons often see many homeowners get denied the opportunity to refinance their mortgage loans or get an unfavorable one.
A down market could have negative impact
Home values in your neighbourhood have a great implication when you are thinking of refinancing your mortgage loans. When it is on the decline, you are liable to be denied the option of refinancing. No financial institution is ready to lose in the long term right? This is very rampant in places with poor economic and market conditions, like foreclosures and short sales. Know when to apply for refinancing on your mortgage loans in this short piece.
Reduction in Monthly payment not guaranteed
When refinancing your mortgage loans, your primary objective is of high importance. If it is to cash out on your home’s equity or reduce your loan term, there is a guaranteed increment on your monthly payment. This increment can, however, impact a huge strain on your monthly income and budget over time. It is advisable you ensure that you only go for loans that will remain affordable over time.
Key Takeaways
Refinancing your mortgage isn’t something to joke about or handle with kid’s gloves. You never can be sure of everything even when your interest rate is low and you possess a strong borrower’s profile. Refinancing your mortgage loans could be the lifesaver you’ve been waiting for. However, there are many things that could go wrong, and it is advisable by experts that you check them all out before making the final decision.
Thinking of refinancing your mortgage loans? Get to know how it works here!
