Refinancing is basically a new loan. And taking out a new loan in place of another one you already have may seem like a bad idea. But in certain circumstances, it can be very beneficial.
Many others think that too, especially in this era when there’s a lot of uncertainty regarding the economy. In mid-August of 2020, refinancing loan applications rose by 58% in the U.S., compared to the same period in 2019. This trend is also observed in other countries. In May 2020, Australia hit a record high of 63.10% increase of refinances compared to the previous year.
In the past few months, interest rates are going down due to the pandemic. Given this fact, now might be the right time to refinance your mortgage, if you’ve been considering it for a long time now.
Benefits of Refinancing a Loan
People don’t apply for refinancing out of the blue. Opening a loan often comes with a long decision-making process to ensure minimal risks. Here are some reasons why others are keen on refinancing their mortgage, which may convince you as well:
Lower Interest Rates
You are likely to get lower interest rates when you reapply and get approved for a refinancing loan. The difference might seem not obvious on paper. For example, some refinance loans have a 1% rate reduction. The number is quite small. But in the long term, it can present big savings every month compared to when you’re paying for your original loan. If your credit score improved, you may also get better rates when you refinance your mortgage.
Lower Mortgage Amortization
Lower interest rates mean lower monthly payments. But that doesn’t mean you’re paying more. Having lower monthly payments can help you improve your finances and lower your overall monthly spending as well. Or if you have other debts to pay, you can re-assign what you’re saving from your mortgage payments to pay off those instead.
Build Equity Faster
When you refinance your mortgage, you can shorten your repayment period. Your 30-year payment period can be shortened to 15 years. The faster you pay off your loan, the faster you can be relieved of a huge financial burden.
You also get to build equity faster. You can take advantage of this particularly if you’re planning to sell your property anytime soon. For instance, there’s currently a housing shortage in the U.S. There are many homebuyers but not enough property for everyone. As such, home prices are increasing. If this trend continues in the next few years and you decide to sell your property, you’ll be able to get a good deal for your home.
Debt Consolidation
You can also get cash-out refinancing if you’re eligible. Consider asking your insurance broker to determine if you can avail of it.
With cash-out refinancing, you can consolidate your debts by paying off your other personal debts. For example, say you have credit card debts with high interest rates. You can pay them using your cash out so that you can start fresh and be in a better financial situation.
Disadvantages of Refinancing a Loan
Taking out a new loan on your mortgage does have its disadvantages. And knowing them will help you reconsider if you’re ready for it.
Additional Costs
Refinancing a mortgage comes with fees. You need to consider them before opening a new loan to determine if you’ll really get a good deal or if you should postpone your plans for a refinance. Closing costs for a refinance can run from $4,000 to $10,000, depending on the value and location of your property. These costs usually include your application fee, origination fee, title insurance, taxes, and so on.
Difference Not Justifiable
Before you start applying for a refinance, you need to do some computations first. Check how much you will have to pay to complete your mortgage with your potential new monthly amortization and the shorter repayment period. You’ll also have to consider your closing costs. Find a refinance break-even calculator to check how long it will take for you to get back your closing costs through your loan savings.
If it will take more years for you to get a break-even than your prospected length of stay, perhaps you shouldn’t refinance your mortgage.
The low interest rates during the pandemic can make refinancing quite tempting. Many others have already been tempted and succeeded in refinancing their mortgage. But just because others are doing it, doesn’t mean you should too. Before anything else, you have to weigh the pros and cons. If you think that you’ll get a better deal with refinancing, then there’s no harm in getting one.
Meta title:The Pros and Cons of Refinancing a Mortgage
meta desc: Many homeowners applied for refinancing in 2020. It seems to be a good option given the economic strain brought by the pandemic. But should you get one, too?
