Advantages & Disadvantages of Refinancing Home
When you refinance your home there are advantages as well as disadvantages. Before refinancing, check with several lenders to see what their terms and agreements are. Weigh the costs involved to determine whether refinancing makes financial sense for you. There could be one advantage which is outweighed by three or four disadvantages during the refinancing process.
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Costs
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Determine what you'll have to pay. You may have to pay for an appraisal, closing costs, credit report, filing fees and title insurance costs. These costs can be substantial and if you are not going to stay in your home long enough to recoup your costs it may not be worth your while to refinance. It's a good idea to calculate the amount of time you need to stay in your home before you can recoup your costs.
Interest Rate
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Find out what interest rate you can get. An advantage of refinancing your loan is receiving a lower interest rate. If you can receive a rate 2 percent less than your current rate you can save a substantial amount of money over the life of the loan. A lower interest rate will provide you with a lower payment. You free up more of your money for other purposes when your mortgage payment is reduced.
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Liens/Judgments
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When you refinance your mortgage you must pay off any lines of credit, judgments, liens or encumbrances on your mortgage. This can be a disadvantage because it will reduce the equity you have to work with. If there is not enough equity in your home you may not be able to refinance.
Credit History
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Check your credit history. If you have made any payments late during the last 12 months you may be disqualified from refinancing. Late payments can lower your credit score and cause you to incur a higher interest rate along with a larger payment. Some lenders want your credit score to be 620 or more before they will refinance your loan.
New Term
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If your original term was 30 years and you refinance during the early years of the contract to a 15-year term, you will cut years off your mortgage loan. You will save a substantial amount of finance charges with a shorter-term mortgage. Refinancing allows you to finance a smaller loan amount, depending on how much you have reduced your principal balance.
Fixed Rate/ARM
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If you have an adjustable rate mortgage (ARM), refinancing allows you to receive a fixed rate. This can be an advantage if you don't want your payments fluctuating. Having the same payment month in and month out helps you budget more effectively. If the interest rate increases too much with an ARM your mortgage payment could become unaffordable and cause some undue hardships.
Consolidation
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You can consolidate high rate credit card balances when you refinance by tapping the equity in your home. Making one payment is more convenient than making several.
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