It is not uncommon for Americans to be struggling to pay their bills when the economy is in crisis. Though people may have been able to comfortably pay their mortgages in previous years, many people are looking to refinance their mortgages to obtain a lower monthly payment. What are the pros and cons of refinancing?
A lower monthly mortgage payment is not the only effect of mortgage refinancing. One of the benefits of mortgage refinancing is the ability to lock in a lower interest rate. People may get a type of mortgage for which they can get approved at the time of the home purchase with plans on refinancing to get a better type of mortgage or better interest rate at a later time.
An adjustable interest rate mortgage may be refinanced for a fixed interest rate mortgage while the interest rates are low. Some people may only qualify for an ARM mortgage that has a balloon payment due after seven or fifteen years. For people who have a mortgage with a balloon payment due, it is often necessary to refinance to avoid this lump sum payment.
There are some disadvantages of refinancing a mortgage. Homeowners often have to pay fees and other closing costs to get a mortgage refinanced. These closing costs can be thousands of dollars. It’s very important for homeowners to obtain a disclosure of the closing costs from the mortgage company or bank doing the refinancing.
Another possible disadvantage is time added to the loan. If a homeowner has fifteen years left on their mortgage, it may or may not make sense for them to refinance for a thirty year mortgage. By doing so, they are adding fifteen years to the life of their loan. However, if the current payment is causing hardship or a looming balloon payment is unattainable, it may be beneficial to refinance for a lower monthly payment.
A potential problem with mortgage refinancing is pulling cash out of the equity in the home. Though homeowners may need money for legitimate reasons, the homeowners should consider the long term costs cashing in their equity. The equity in the home is often a homeowner’s greatest asset.
Any time a person is cashing in an asset, the person should consider any ramifications for doing so. For example, some people have found it necessary to use home equity to help pay for retirement either by selling the house or getting a home equity loan to pay off high-interest debt. If a person has already cashed in their equity, it typically takes years to build a significant amount of equity.