Refinancing a mortgage means that you are replacing your current mortgage loan with a newer mortgage loan. Refinancing may work for some people and not for others. However, as with anything, there is good, bad, and ugly to refinancing one's mortgage. In this post, we will explore some of the good, bad, and ugly to reducing your mortgage as well as how to protect yourself from ending up with a worse deal after the refinance than you had before you refinanced.
The Good About Refinancing Your Home:
Some of the reasons that people wish to refinance their homes are entirely legitimate, and many refinances do help the homeowner save money. The following are situations in which a homeowner may benefit from a home refinance:
- You can often lower your monthly payments to a more affordable amount that fits your budget.
- In some cases, you may be able to reduce your borrowing costs.
- You may be able to decrease your interest rates (allows you to pay more towards the principal of your loan and less to the bank on interest)
- Many refinancers today will allow you to make payments online which makes paying your mortgage more convenient.
- You will have more loan options than ever meaning you can find an opportunity that best fits your needs
- Some lenders may specialize in loans that include FHA loans or Veteran's Affairs loans meaning that the loan you have offers you unique refinancing options to meet your personal needs and those of your existing loans the best
These are some of the perks that refinancing your home may offer you as someone seeking more affordable, more manageable monthly payments. In other cases, it may be the situation that interest rates that have come down or are fixed so that you can pay more to the principal rather than on skyrocketing interest rates.
The Bad About Refinancing Your Home:
Just like there can be upsides to refinancing your home, there can also be downsides. If you don't do it correctly, refinancing your home can lead to financial issues moving forward. The following are some of the disadvantages that may come into play when you go looking to refinance your home:
- Your interest rates may go up if they are not "fixed" or guaranteed for the life of the loan you may find yourself in a refinancing situation that means that you got an adjustable interest rate, which means that your interest rates may go up when interest rates throughout the US rise. You might end up paying more and not less.
- Make sure refinancing is not adding an excessive amount of time to the loan you are currently paying on. If it does then maybe reconsider a shorter-term refinance or a different lender to get what you need not to add all that time to your loan.
- Never refinance your home to save money to invest. Paying down a 5-6% mortgage makes a lot more sense than investing in a 2.5% CD. Once you pay off your home, then you can spend more aggressively with the money that you were using to pay your mortgage.
- You should never be taking a refinance option to use that money for another home. If you are planning to move in two years but will be paying off a refinanced home for five more years, then it doesn't make sense for you to refinance as you may never recoup the money it costs you to do the refinance.
If refinancing leaves you in one of these situations, then consider just staying with the mortgage that you have now. In these cases, refinancing may very well end up costing you more than you save in your monthly payments.
The Ugly About Refinancing Your Home:
While refinancing your home in some instances might make sense for you. However, that doesn't always mean that refinancing your home is a natural or pleasurable thing to do. Some of the ugly that can sometimes come with refinancing includes the following:
- You may end up extending the amount of time you are paying on your home. Even if you are saving money on your monthly payment, you may end up paying more in the long-run.
- You may find yourself stressed out if you end up paying more than one lender at a time. You are paying off one loan before focusing on another, especially if both payments combined end up costing you more than you paid before the refinance.
- Some lenders may deny you for refinancing if your credit score is not high enough (most lenders require a score of at least 620 or higher) or you may not even get considered for their program.
There can be an "ugly" side to refinancing your home even if you have good intentions and would save money by refinancing your mortgage. These reasons can include a poor credit score, a poor payment history on your current loan, or you not having the cash to pay the fees that are necessary to refinance your home.
In the end, it's up to you to understand what you will lose or gain if you refinance your home. It can be a smart move in certain situations where you may save money, but if you are doing it to lower your payments to use that money for something else you might want to rethink your refinancing options before you make your final decision.