Refinancing is a great way to lower your interest rate and get your home paid off faster, but it also has some drawbacks. This is a big decision that requires careful thought, so consider the following pros and cons before you go through with it.
Pro: Lower Your Interest Rate
One of the top reasons people get their mortgage refinanced is to lower their interest rate. After all, the lower your interest rate is, the less your monthly payments are and the less you are paying overall for your home. Whether you are on a tight budget, have lost your job, or just feel like it's time to lower that interest rate, this is a great reason to refinance. It also happens to be one of the top benefits of doing so.
Con: There is Financial Risk
While you can benefit from a lower interest rate, there is still some financial risk when you decide to refinance your home. You may be at a higher risk for foreclosure if for some reason you can't pay your mortgage on time. In many cases, the contract signed during refinance makes the bank less lenient to give you ample time for paying your mortgage if it is late. They may also seize your other assets if you at default on your mortgage.
Pro: Convert to a Fixed Rate Mortgage
If you have an adjustable rate mortgage, it means the interest rate you pay may go up if the average interest rates at the bank goes up. This can put you in financial strain as you might not know it is coming, then suddenly your mortgage payments are higher. However, when you refinance, you may have the option of converting your mortgage to one with a fixed rate. This means the rate will never change, so there are no surprises.
Con: Some Fees Are High
The exchange for a lower interest rate and fixed rate is sometimes higher fees. Refinancing is not free and in some cases, not inexpensive. While you will save more in the long run if refinancing provides you with a lower interest rate and lower monthly payments, you will need to pay a variety of fees. Typical fees include those to a financial adviser if you have one, taxes, and fees to the bank for processing your application.
Pro: Shorter Loan Period
During your refinancing process, you can also request to shorten the length of your loan. This means you will have your home paid off in less time. You might be paying a slightly higher mortgage rate each month to accomplish this, but you will save in interest, so it ends up working quite well in the end.
For more information, contact Liberty Escrow Inc. or a similar company.