Pros & Cons of Refinancing Your Home Mortgage Loan
Advantages of Refinancing Your Mortgage Loan
1. It Could Reduce Your Lifetime Interest Costs
Reducing lifetime interest costs — and your total borrowing costs along with them — is among the most compelling reasons to refinance a mortgage. Many homeowners refinance with this objective in mind.
Lowering the Interest Rate. Getting a lower interest rate is much more likely to occur if rates have fallen since your original loan’s issue and critical elements of your borrower profile — such as your credit score, income, and debt-to-income ratio — remain constant or improve.
- Shortening the Term. A shorter term means less time for interest to accrue. The downside is the potential for a higher monthly payment.
It Could Lower Your Monthly Payments
Simply refinancing a higher-rate loan into a lower-rate loan with an equivalent term is likely to lower your monthly payments. If a lower rate isn’t in the cards, a less desirable alternative is to refinance into a longer-term loan and spread your payments over a longer timeframe. The downside of this move is a higher lifetime borrowing cost.
It Could Increase Your Loan’s Predictability
Predictability isn’t a concern if your original loan has a fixed rate. You experience year-to-year variation on the escrow side, as your property taxes and insurance fluctuate. But your principal and interest payment remain fixed for the life of the loan.
But if your original loan has an adjustable rate, predictability is a problem, and refinancing to a fixed-rate loan is a reasonable solution. If your new fixed-rate loan prevents a costly upward rate adjustment, all the better.
It Could Eliminate Mortgage Insurance
The FHA mortgage loan program has helped millions of first-time homebuyers afford places of their own. Maybe you’re among them. If so, you know that your FHA loan carries a hefty cost: high annual mortgage insurance premiums that remain in force for at least 11 years from the issue date (on loans issued after June 2013) — and permanently, in some cases.
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