Refinancing an existing mortgage is an oft-used strategy by homeowners to minimize their monthly mortgage payments. This method aids in shedding off additional interest, thereby reducing your monthly outflows. As with any significant financial judgement, it is essential to weigh the pros and cons thoroughly. Turning the spotlight onto the bounties and risks associated with revamping your current mortgage:
Advantages:
Present-day mortgage rates are way below those witnessed in the previous years. Generally, this implies that the rates are currently lower than when you took out your initial mortgage. Refinancing could grant you a more favorable interest rate, in turn, trimming your monthly payments. Especially worth considering for those with an Adjustable Rate Mortgage (ARM) finance, as an ARM mortgage refinance can be very beneficial. While the present rates are negligeable, this might not always hold water and hence, it’s wise to secure your rates while the going is good, shielding it from market volatility. On occasion, refinancing offers a chance to modify the loan term, either to stretch it out or to expedite the pay-off.
Disadvantages:
It’s typical to be charged some amount of fees during the financing or refinancing of any loan and mortgages are no exception. Although the costs might vary based on the financer, it’s safe to anticipate some charges associated with refinancing. Viewing the loan from a long-term lens could easily offset these costs, as in most cases, borrowers are able to recover upfront costs and save considerable sums of money down the line. Though benefits generally outbid risks, it varies case by case, underlining the importance of seeking a mortgage advisor’s counsel.
Reduced Interest Rate:
If you were to refinance a mortgage of $100,000 over 30 years from a 6.25 percent interest rate to a 5.5 percent, your monthly payments could dip by $47.91 allowing you to save $17,253 in total interest charges. This drives people to refinance, especially with the attractive interest rates today.
Modifying Loan Term:
On extending the term of a $100,000 mortgage at 6.25 percent interest from 15 to 20 years, the monthly payments could shrink by $126.49. Conversely, on trimming a 20-year mortgage term to 15 years, you could slash the mortgage repayment period by 5 years. Both possibilities make a compelling case for refinancing, contingent on your future financial prognosis.
By skillful negotiation, it is plausible to achieve both a reduction in interest rate and a term adjustment. This would entail bargaining for the absolute minimum interest rate and then determining the most advantageous term.
Interest Only Mortgage:
Opting to refinance with an interest-only mortgage can provide the lowest possible monthly payments. While this seems attractive, after the interest-only term expires (generally around 5 or 10 years), the monthly payments see a significant hike. This option suits those with an unstable current financial situation but expecting a sound financial future, though it carries a higher risk quotient.
In Conclusion:
It is crucial that in opting to refinance your loan, you must ensure that it is aligned to your financial standing and future outlook. Even with a lower interest rate, you might end up shelling out more money than needed. If you have any doubts about the merits or pitfalls related to refinancing, make sure to consult with a trusted mortgage lender.
