Refinancing a mortgage can be a wise decision for several reasons. However, it may not be for everyone. According to mortgage experts, homeowners spend an average of seven years or fewer in a home before moving or refinancing. When interest rates are declining, the holding period tends to decrease even more. Like purchasing a home, refinancing a mortgage is a big decision that shouldn't be made on a whim. Consider these pros and cons and speak to your mortgage advisor before making the decision to refinance.
The Pros
1. Can Lower Your Payments - The first reason for refinancing is that it can lower a homeowner's mortgage payments. Since a large chunk of your mortgage payment is designated to go toward interest, refinancing at a lower interest rate can significantly reduce your recurring payments.
2. Can Improve Terms - An attractive option for homeowners is to switch from an adjustable rate mortgage to a fixed rate, or adjust their existing adjustable rate terms. Refinancing can also reduce the length of a mortgage, resulting in long term savings. For instance, when refinancing, you could switch from a traditional 30 year mortgage to a 20 or 15 year mortgage.
3. Get Cash From Your Home Equity - If you have a considerable amount of home equity built up, you may want to consider a cash-out refinance. This option replaces your current mortgage with a new loan with a higher loan amount. The difference between the two mortgages is "cashed out" and the money is given to you to use for whatever you like. You can also use this method to consolidate debts by putting the money toward your bills, rather than getting cash in your pocket.
Cons
1. Up-Front Costs - Typically, refinancing costs are about 2% of the mortgage, though this can vary a great deal depending on the mortgage program you choose. The costs are similar to when you originally took out the loan - application fees, attorney's fees, title search, etc. The general advice from most mortgage experts has been that it's worth refinancing if the money you're saving on payments will pay off the refinancing costs within two years.
2. Time Involved - Refinancing, like taking out a purchase loan, is a complicated process. Be prepared to devote some time into finding the right refinancing option, completing the application process, and to being available for the loan closing. Pulling together the paperwork and providing additional documents if requested does some time and effort - more so if your finances are complicated due to your being self employed or owning several investment properties; or if you tend to be disorganized.
To best determine whether you should refinance or not, do some research on the refinancing options and talk to your mortgage advisor. He or she should be able to look at the numbers with you to calculate your potential savings and answer any questions you may have. Refinancing can have many benefits, but it doesn't always make financial sense for every homeowner. Educate yourself so that you are better prepared to make an informed decision.
Article Source: http://www.articlesbase.com/mortgage-articles/the-pros-and-cons-of-refinancing-a-mortgage-5168192.html
About the Author
Steph Medeiros is a marketing professional who helps mortgage companies promote their brands and products, such as 5/1 ARM loans and 15 year mortgage rates
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