Mortgage Refinancing – Advantages And Drawbacks

Refinancing mortgages typically means replacing one loan with another at new terms. It is a very effective financial solution if you are thinking about reducing the liability of your mortgage. Additionally, you can also enjoy its manifold benefits such as reduced rate of interest on the previous loan, shortened repayment term, pay off mortgage sooner, and debt consolidation. With mortgage refinancing you can also tap the equity in your home and utilize the funds raised for meeting the monetary needs of the time such as business expansion, home renovation and others. But as there are positives, there are some negatives as well which when overlooked can jeopardize your finances badly.

Advantages

Mortgage refinancing is highly recommended when you are unable to bear the burden of huge monthly installments, because the new loan can be acquired at reduced interest rate compared to what you are paying on the existing loan. Furthermore, achieving better credit scores is another major reason for refinancing. Homeowners who are struggling with bad credit can opt for mortgage refinancing, since it will provide them with many opportunities to improve their credit scores considerably; thus increasing their odds of getting loans at affordable interest rates.

Another reason to go for this financial solution is moving from a variable rate mortgage to a fixed rate mortgage. Many homeowners prefer a fixed rate mortgage for the sake of avoiding the risk due to unpredictable market conditions, because it is very difficult to forecast when the market will rise or fall. You can also negotiate on the payback period and get you debt under control.

Drawbacks

The benefits of refinancing can prove to be useless if the reasons for behind it are not that strong. On the other hand, it may put you in an unending debt cycle and you will have to struggle for years to return to normal. Before you refinance, identify whether the purpose is strong enough for taking this step. For example, if you are planning to move out of the house in say less than 5 years, then you must think about other options instead of going for refinancing. Another risk is that if you default on the monthly obligations the lender can seize your asset to recover the loan amount.  

It is advisable to consult a mortgage broker or a mortgage specialist so that you are aware of all the pros and cons and think about ways to tackle the issues that may harm your finances now and then.