Refinancing: Pros, Cons, and What it Can Do for You

a loan applicationRefinancing a home mortgage can be daunting. You can solve financial troubles in many ways, so consider the benefits and disadvantages of each option.

Refinancing vs. Mortgaging

To be clear, refinancing is different from getting a second mortgage. Financing expert Primary Residential Mortgage, Inc. states that a second mortgage simply allows you to make use of the equity you have in your property, thus leaving you with two loans.

Refinancing wipes out the original mortgage and replaces it with a brand-new one. Before agreeing to refinance, check that the terms of the new loan are better than the old one—this is assuming it was your choice to get refinanced.

Getting out of a Bad Thing

Home mortgages are not created equally. A deal you had several years ago may not be the best deal you can get today. Adjustable rate mortgages are a good example of this type of arrangement.

These come with an attractively low-interest rate for the first year or so, but look out: you may be surprised to find that the interest rate has tripled (or more!) afterwards.

Sometimes, when you’re no longer in control of the property – as in a divorce settlement or anything similar – and yet you’re still responsible for the mortgage, the only way to get out of it and change the co-signatory is to refinance it.

Perhaps you would also like to pay your mortgage sooner. You can refinance a thirty-year mortgage to a ten- or fifteen-year one instead. You may also do the opposite should you want to lower your monthly amortizations.

Restrictions

Most lenders only allow refinancing without private mortgage insurance (PMI) if your loan to value ratio is at 80% or less. So if your home is valued at 100,000USD, you can only refinance without PMI if you owe 80,000USD or less on it. PMI will add an extra cost to your amortization making refinancing ill-advised.

If, however, your mortgage is under Freddie Mac or Fannie May, you can use a Home Affordable Refinance Program (HARP) on your home loan.

By consulting a mortgage lender, you stand a good chance of getting the best deal for your situation.

Posted on by Tsfp6 in Money Times

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