The purchase of mortgage-backed securities by the US Federal Reserve has helped into keep the housing market more or less stable. This is why average rates of 30-year fixed rate mortgages have continued to be low. As a result, home purchase and mortgage refinance continue to soar in numbers that is in tandem with the historic low prices quoted by the lenders.
However, speaking mainly of refinancing here, people should understand the implications on their financial and personal lives if they opt for the same. The people can also ask mortgage questions to an experienced lender in order to take out the right home loan. This will help them make smarter decisions with respect to their finances.
Advantages of refinancing mortgage loans
Here are some of the benefits to refinance mortgages with current low rates:
- Constant rate of interest – Through a refinance, borrowers can convert their existing changeable-interest or interest-only mortgage loans into a fixed-interest rate mortgages. Having fixed rate mortgages relieves borrowers from the anxiety of a hike in the rates in future. Moreover, due to a fixed interest rate, the monthly payment amount will also remain constant throughout the term of the loan.
- Fresh bout of liquidity – In case of cash-out refinance, borrowers will able to get fresh bout of liquid money by utilizing their home equity. However, borrowers need to have good home equity in order to qualify for a cash-out refinance loan.
- Reduced rate of interest – As a result of a mortgage refinance, borrowers will get to lower the rate of interest from the existing one. This helps in to a save a good amount of money in the long run.
Disadvantages of refinancing mortgage loans
Not everything is greener while considering mortgage refinance as a debt relief option. This is because of the following reasons:
- Loss of home equity – Borrowers should ensure that they get a no-cost refinance loan or bear the loan origination costs themselves. This is because if they fail to do so, then the lenders will add up those costs in the new mortgage loan. Moreover, borrowers may suffer losses in case they sell off their properties before regaining the lost home equity.
- Extension of loan repayment term – In a mortgage refinance, many borrowers choose to extend their loan term. In this case, borrowers who have regularly made the monthly payments say for 10 years will have to start making the monthly payments from scratch due to a 30-year fixed rate refinanced loan. Hence, it will further extend the debt repayment period for a lot more years. Likewise, opting for a 15-year fixed rate mortgage loan will force borrowers to make higher monthly payments.
- Closing costs of refinance – Many a times, lenders ask for a huge amount of upfront fees in order to close a mortgage refinance deal. In such a situation, it will take considerable amount of time for the borrowers to get over their break-even point. Ideally, a mortgage refinance should not cost more than 3-6% of the total loan value.
Therefore, borrowers should read the mortgage documents carefully and ask for good-faith estimates from the lenders before closing a refinance deal.