Many people today are choosing to refinance their mortgage. By refinancing, you could be able to secure a lower interest rate, and you could reduce your monthly payment. However, before making the decision to refinance, you need to be aware of some pitfalls; therefore, here are three possible dangers of refinancing your mortgage.
1. Higher costs:
You are tempted to refinance because you can obtain a lower interest rate; however, in some cases, lenders increase their fees, so you could end up paying more to refinance. In reality, the lowest interest rates are often reserved for people who have an excellent credit score. Because of the higher fees and higher cost of insurance, refinancing might not save you any money. Before you refinance, you need to make sure that you are getting a low interest rate because you will be charged fees each time you refinance. In addition, when you refinance, you will be paying the cost of closing, an application fee and many other fees.
2. The life of the loan is longer:
You might be tempted to extend the life of the loan because you will be paying lower monthly payments. This is usually not a wise thing to do. You will pay more in interest, and you will be in debt longer. You do not want to retire when you still have a house payment; therefore, you need to pay off your home as quickly as possible. After your home is paid off, you can start saving money for retirement or invest it. You do not want to still be paying a mortgage in your latter years. Therefore, you need to know exactly how long it will take to pay off your mortgage. You can find mortgage calculators online that will show you how much money that you will save by refinancing. If you are not saving a significant amount of money, refinancing might not be your best option.
3. Prepayment penalties:
It is important for you to read the terms and conditions of the contract. Some lenders charge a fee for refinancing or paying off the loan early. If you choose to refinance, you want to go with a reputable lender who does not charge for paying the loan early. If the refinancing includes a prepayment penalty, you could ask the lender to waive this part of the contract. If you have good credit, you have a very good chance of avoiding prepayment penalties. If the lender will not waive the fee, refinancing might not be the best option. You will be paying for the appraisal, the land survey, a title search and other costs associated with refinancing; therefore, if you will be required to pay a prepayment penalty, refinancing might not be worth it.
Refinancing does have advantages; however, make sure that you do not make the mistakes that come with refinancing. Therefore, you need to find a reputable lender whom you can trust to give you a great deal on refinancing your mortgage. If you can avoid these pitfalls, refinancing could actually have you a good amount of money.
Sam is a financial blogger who works alongside Tim Sykes.