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Apr 01

The Pros And Cons Of Mortgage Refinance

Reading Time: 3 mins

As a current or prospective homeowner, there are many things you need to understand regarding loans. Signing a mortgage agreement with a given bank allows you to buy your dream home. However, sometimes it gets to a point where you’d prefer signing a new deal to reduce the interest rate by a significant margin.

That’s where mortgage refinance plans come into play. It means you’re replacing the existing mortgage with another one. The new agreed-upon deal comes with many different factors, from interest rates to the number of monthly instalments. 

Mortgage refinancing can save you a lot of money. However, that’s not to say it’s full of advantages. This process comes with its fair share of drawbacks. In the article, you’ll learn the main pros and cons of refinancing your mortgage.

Pros of mortgage refinancing 

Here are the main advantages of refinancing your mortgage:  

  • Better interest rates 

There is a high chance that any mortgage you take today will have very low-interest rates. Moreover, over the past few years, mortgage rates have dropped significantly. Therefore, if you bought your home a decade ago, refinancing your mortgage with this objective might yield positive results. 

Of course, to avoid going in blindly, it’d be wise first to find an informative rates page that compares interest rates from all banks within your locality. This way, you’ll be sure if the move your planning is worth the hassle. As a rule of thumb, you should only consider making this change if the rate difference is at least 2%.

  • Reduce monthly payments 

If your monthly budget is becoming tighter every day, you might want to consider mortgage refinancing. For instance, say you’re currently paying GBP£100,000 (around NZD$1,900) and still have 15 years left. Refinancing this mortgage to 20 years will significantly drop that amount and give you enough financial space to work on other projects. 

  • Quicker payment 

You might be looking to complete your mortgage payment a few years earlier than anticipated. Refinancing the mortgage will give you the option of reducing the years by a significant margin. For instance, you could opt to do another 10 years rather than 15 or 20 years, as initially stated in the deal. That means you’ll be able to pay off the loan five or ten years earlier.

 

Disadvantages of mortgage refinancing 

Before you get your mortgage refinanced, here are three disadvantages you’ll need to remember:

  • Consider closing costs

Like the original mortgage, refinancing will also require you to pay some closing costs before the whole process can be approved. Some fees you’ll need to consider should include original loan, appraisal and legal fees.

Generally, these fees may add up to 6% of the remaining mortgage principal. Say you still need to pay GBP£150,000 (NZD$287,000). You should plan to pay an extra GBP£9,000 (NZD$17,000) to cover the costs. Keep in mind that the fees may vary with financial institutions, type of mortgage and the amount of money you still owe the bank. 

  • Monthly payments could increase 

Reducing the number of years may have long-term benefits, but it also comes with disadvantages. To balance that reduction in the time length, you’ll need to pay more money every month. So if you’re working with a tight budget, then this refinance option might not be ideal for you.

  • An increase in term length can be costly 

The positive side of increasing your term length is reducing monthly payments. However, that can be quite costly because you’ll have to pay more interest for the additional 10 years or so. Of course, it can be worth it if you’re looking to reduce your monthly responsibilities. 

It’s, however, essential to understand the critical details of whatever deal you’re getting into. This way, you’ll know how much your mortgage will amount to and if the new total is worth the sacrifice.

 

Conclusion

When it comes right down to it, mortgage refinancing is replacing your current mortgage with a new one. The new deal usually comes with new terms that’ll be beneficial to you in one way or another depending on the needs. For instance, if you want to significantly reduce the amount of money you pay every month, you could opt for a more extended repayment period.

Similarly, a shorter repayment period means you’ll need to increase what you pay every month. As you’d expect, though, any additional year to your initial period attracts more annual interests. Therefore, you should only increase the number of years if it’s your final option. While at it, don’t forget to add closing costs to your calculations regardless of the refinance option. All these will depend on the type of mortgage you take and the financial institution.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. 

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