Pros and Cons of Mortgage Refinancing

Homeowners enter into mortgage refinancing for various reasons. The most common is to refinance real estate when interest rates drop. Borrowers who obtain an interest rate reduction of as little as one-half percent can save thousands of dollars over the term of the mortgage note.

Mortgage refinancing is oftentimes used when homeowners want to cash out their home equity to obtain a lump sum of money. Home loan interest rates are significantly lower than most types of credit. When homeowners need funds for a major purchase or financial investment, it is sometimes less costly to refinance a home mortgage loan than use credit cards or obtain an unsecured loan.

Refinancing home loans is similar to taking out the original mortgage loan. Borrowers are required to submit a loan application and pay associated fees. Sometimes credit paperwork is waived when borrowers work with their current lender.

Although obtaining mortgage refinancing through the current lender can be easier, it is a good idea to shop around for home loans. The Internet is a good option which allows individuals to determine which mortgage lenders offer the best deal.

When researching mortgage refinancing costs it is important to read the fine print. Realize you are placing your home on the line, so embark on due diligence to ensure you are working with a trustworthy mortgage lender. If necessary, consult with a mortgage broker, home loan specialist, real estate lawyer, or housing counselor.

The Department of Housing and Urban Development (HUD) offers listings of nationwide housing counselors via their website at hud.gov. HUD devotes an entire section to mortgage refinancing advice and provides lender comparison guides and financial worksheets to help homeowners make informed decisions.

Borrowers should review their current home loan contract to determine if their lender imposes a prepayment penalty. Lenders are required by law to provide a Truth in Lending Disclosure Statement (TIL) when providing home mortgage loans. Many people do not read TILs and are surprised to learn they will be financially penalized for paying the loan off early. Homeowners with two or more mortgages can take a hard financial hit.

In addition to prepayment penalties, closing costs are associated with mortgage refinancing. Closing costs include loan application fees, origination costs, real estate appraisals, land survey, title search and insurance, and legal fees. Closing settlement costs can be upwards of 6-percent of the outstanding principal and interest.

Some mortgage lenders offer no-cost home loans, which typically cost more than paying closing costs upfront. With no-cost mortgage refinancing, settlement fees are rolled into the loan. Borrowers may interest on closing costs for the duration of the loan. Settlement costs of $12,000 could cost borrowers an additional $18,000 in interest on a 30-year mortgage note.

Mortgage refinancing does offer financial benefits. However, borrowers must calculate the true cost of refinancing and consider the advantages and disadvantages of entering into a new home loan. Homeowners should only refinance mortgages if doing so makes financial sense.

Chances are your home is your most valuable asset and every effort should be taken to protect it. Making poor financial decisions or refinancing to obtain money for unnecessary items can place your property at risk for foreclosure. Take time to fully understand the risks before extending the terms of your mortgage loan.

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Posted in: Mortgage,Refinancing