With current interest rates quite low, the option of refinancing your mortgage looks quite tempting. When you choose to refinance your current mortgage, you are simply replacing it with another one. However, this new mortgage would come with different monthly payment, duration and interest rate.
Depending on your current circumstances, refinancing can be a fantastic way to save more money on your current mortgage, but it is suited for everyone. It comes with a lot of pros and cons depending on the terms placed on the new mortgage by your lender. If you’re struggling to meet up with your monthly payments either due to loss of income or additional financial responsibilities, refinancing can relieve you of some pressure.
For example, if you are moving from a shorter-term mortgage to a longer one, while the benefit would be much lower monthly payments, the downside would be paying higher interest at the end of the mortgage.
At the moment, mortgage interest rates are at an all-time low and those with fixed-rate mortgages can refinance to take advantage of this. Even the slightest difference in interest rates can make a huge difference in cost savings on your overall mortgage. Also, refinancing can allow you to cash in on your home’s equity and you can decide to make a loan overpayment on your current mortgage by paying more money than the agreed monthly sum to improve your home equity, clear your debt faster and reduce the total interest paid throughout the mortgage period.
Another advantage of refinancing is being able to switch rates from a variable rate mortgage to a fixed-rate mortgage. If you’re switching from a variable to a low fixed-rate mortgage, you are completely protected against sporadic changes in interest rates.
However, refinancing comes with its own disadvantages for those who aren’t best suited for it. If you choose to refinance your mortgage, you would be essentially resetting your amortization schedule and would have to pay the cost of closing your mortgage. A refinance is most likely not the best move for you if you intend to move out of the house soon, as there would be little time left to recoup your closing costs.
Even though the economy is slowly recovering from the impact of the coronavirus pandemic, many families are still battling financial uncertainty. Therefore, if you’re in a situation where your income isn’t certain, refinancing your mortgage may not be worth the try until you’re very certain you can afford to do so.