With mortgage interest rates plunging to near rock bottom, you might be considering refinancing your home loan. When you see those ads showing how much you could save every month if you do, it really is tempting; but is refinancing really the smartest move for your personal circumstances? Like most things in life, there are pros and cons to refinancing your mortgage. Take a look at these facts before you make a hasty decision.
The Bright Side
When you refinance your home at a lower interest rate, your monthly payment will be reduced. That means you’ll free up more cash that you can use to pay off other debts or add to your retirement funds.
Another advantage to refinancing is that you will have an entirely new mortgage and, if it’s affordable, you could shorten the terms of the loan on your Rancho Santa Fe real estate. If you currently have 20 more years to pay on your mortgage, but are able to write the new note for 15 years, you’ll save an entire 5 years of interest payments. Your payment still might be less than you’re paying now if the interest rate drop is significant.
On the other hand, you could extend the term of the loan to make your monthly payments lower yet. Of course, that means you’ll be making house payments longer, but depending on your circumstances, it could be the best way to improve your financial situation at this time.
You could even get rid of that unpredictable adjustable rate mortgage and pick up one which has a fixed rate. That gives you more control over your budget because you’ll be protected from unexpected interest rate increases.
The Down Side of Refinancing
There are costs to refinancing. You’ll have to pay things like an application fee, title search fee, credit report fee, appraisal fee, and closing costs. Make sure your savings will justify the expenses.
When you refinance, what you’re technically doing is paying off your current mortgage and taking on a new one. You may be subject to a penalty when you pay off your existing mortgage before the end of its term. Check your contract to see what it says about early payoffs.
Refinancing may also cause you to pay more taxes because you will be paying less interest on your mortgage. That will make your deduction smaller and your taxes higher.
Lending institutions have tightened their lending requirements, so if your credit rating is less than stellar, you may have a hard time getting approved for refinancing.
Those are some of the main pros and cons of refinancing your home mortgage. Take your personal circumstances into consideration when thinking about refinancing and decide if this is the right move for you. If you think it is, check with your current lender, then take a look at some others. You may find that you can get a better deal from someone else.