Mortgage refinancing is a big business. It can either pay off or backfire. Before you jump into this complicated process, consider the following five important facts before you refinance your home you should consider before you find yourself needing a foreclosure lawyer.
- Refinancing offers clear benefits when interest rates remain historically low. Since the size of your monthly mortgage payment is a function of your mortgage’s effective interest rate, it stands to reason that you’ll save money by reducing this value. If you took out a fixed-rate mortgage to purchase your home more than five years ago, your rate is probably higher than today’s standard refinancing rates. The refinancing process might save you thousands of dollars over the long haul.
- Refinancing your mortgage may also make your loan more flexible. Your current mortgage agreement may hamstring you with unreasonable terms like prepayment penalties that charge you extra for advance lump-sum payments. The refinancing process may do away with many of these restrictions.
- The refinancing process comes with its share of drawbacks as well. For instance, refinancing usually involves a combination of fees and penalties levied by your original mortgage provider. You can expect to pay a sum equivalent to three months of payments on your original loan for the privilege of refinancing your mortgage to a lower rate.
- Your original mortgage may come with a prepayment penalty or “interest-rate differential” designed to prevent you from paying off or refinancing your mortgage before a set date. While the refinancing process doesn’t technically pay off your mortgage, it does fully compensate your original lender. As such, your provider loses out on the thousands of dollars in future interest payments that your account would have generated. To avoid paying through the nose for an early refinancing, try to wait until your prepayment penalty period has elapsed.
You should approach the possibility of refinancing your mortgage as you would any weighty financial decision. Resist any quick-decision pressure from your refinancing institution as you consider the pros and cons of renewing the terms of your financing. While you should never neglect the advice of financial experts, you should also take to heart what you’ve learned about the refinancing process and show some confidence in your gut instincts.
Jennifer Avery is a freelance writer who writes about finance issues.