As a homeowner, with the historic low mortgage interest rates, the market conditions are perfect for refinancing your home loan. But before you can do that, it’s important to understand the pros and cons of refinancing your mortgage so that you can make a better decision. Mortgage refinancing refers to the process of swapping your existing home mortgage with a new one that has better and favorable terms.
For instance, if your financial situation has changed after purchasing your home, seeking mortgage refinancing could be the best option for you especially when the gains are far much better compared to the cost of refinancing.
The following are some of the benefits of refinancing your home loan;
- Homeowners benefit from lower mortgage rates
If mortgage rates have fallen to historic low levels, you can seek mortgage refinancing at the current lower interest rates. When the interest rates are low, a bigger percentage of your monthly payments will go towards clearing your principal loan amount. This is particularly beneficial to homeowners whose financial situations have negatively been affected.
- Lower monthly payments
When the interest rates are low, the monthly payments are also lowered. With low monthly payments, you will save money by paying smaller monthly amounts. When refinancing your home loan, you can even request for an extension of the payoff dates to go beyond the current set deadline.
- It creates room for a more predictable cost
If your initial mortgage financing was under the adjustable-rate mortgage, you can opt to refinance your mortgage by applying for a fixed-rate loan that will lock your mortgage interest rate that you will be paying monthly until you clear your home loan. When the mortgage interest rate is pegged at a certain percentage, you will not have to worry should the current market rate change in the future.
- Borrowers can shorten the payoff time
Many homeowners seek 30-years mortgage financing when purchasing their first home. However, after several years, their financial situation changes for the better and they opt to shorten their mortgage repayment duration.
In such a situation, borrowers seek a 15-year fixed-mortgage rate refinancing. When successful, borrowers can shorten their mortgage repayment term. Shortening the loan term helps them save a lot of money which could have been used to cover the interest of the remaining duration of the home loan.
- Borrowers can build equity fast
When the financial situations of some homeowners are favorable, it makes sense for them to refinance their longer home loans with a shorter fixed-rate new mortgage which comes with higher monthly payment amounts.
Paying bigger monthly payments enables them to build equity on their property faster. Borrowers can benefit from this strategy by saving more money especially when the interest rates are lower than the one for the initial mortgage.
Depending on the borrower’s financial situation and the intended objectives, there many benefits that homeowners can accrue when one seeks to refinance for their home loan. However, there are a few cons of mortgage refinancing which borrowers should keep in mind when making the final decision. They include;
- Depending on your current interest rate, there might be minimal savings
- Mortgage refinancing comes at a cost and you need to weigh the cost versus the expected benefits
Published on 2020-11-19 23:48:23