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With home loan rates averaging below 4 percent nationally as of 2013, many homeowners contemplate the financial benefits of refinancing their mortgage. The opportunity to reduce interest, lower monthly payments and perhaps reduce the loan term make refinancing appealing. However, refinancing does have some disadvantages relative to sticking it out with your existing mortgage.
The primary drawback of a typical refinance is the amount you pay to get the new loan. This often ranges from $3,000 to $6,000 or more, depending on the amount of the new loan and whether you pay discount points for a lower interest rate. These costs mirror what you paid on the first mortgage. So, in essence, you are paying to purchase the same general product a second time.
On a typical refinance, your loan term is extended. For instance, if you have made payments for five years on a 30-year loan and then refinance to another 30-year loan, you add five years back on to your mortgage term. This means that unless you make extra principal payments, you won't own your home outright for five more years. By staying with your current mortgage and making the requisite payments, you could by loan free in 25 years of steady payments.
You may actually be turned down for a mortgage refinance if your current income, debt, credit rating and assets don't add up to meet lender qualifications. As of 2012, mortgage lenders typically maintained stricter borrowing requirements after the housing and credit sector failures of the previous five years. If you don't qualify for the new loan, you may be out an appraisal fee, an application fee and any other upfront fees charged by the lender before approval.
Other refinance issues depend on your particular situation. If you refinance from a fixed to variable-rate loan, the interest may go up over time as mortgage rates rise. Using a refinance to cash out some of the equity in your loan increases your new loan balance and reduces your equity in the home. This is especially a concern if you don't use the cash for a major, necessary purchase.
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