When the end of a mortgage term arrives and early redemption penalties expire, many families wonder if it’s the right time to refinance a home loan. But the answer is not so simple, even if interest rates have dropped. Negotiating a new loan can help a family’s financial status, or it might prove a bad decision.
Many variables must be considered, including mortgage refinancing fees, credit history, the amortization period of the loan, other personal debts, and other financial investment opportunities. A financial decision this important should not be rushed. Below are a number of disadvantages associated with refinancing a home loan. Consider them carefully and judge them against one’s personal circumstances before going forward.
Mortgage Refinancing Fees
The biggest disadvantages to refinancing are all the various fees associated with the process. Lenders and brokers are in the business of making money, and will charge fees at every possible turn. Refinancing a home loan may incur any number of procedural costs—processing, administration, application, arrangement, valuation, inspection, document preparation, appraisal, credit report, notary, recording, etc.
All of these fees can add up to thousands upon thousands of dollars. To weigh these costs against those one might recoup through a lower interest rate over the long term, add up all the fees included in the new home loan contract and compare them to the money saved in interest over the full course of the refinanced mortgage at the lower fixed interest rate.
Determine how long it will take to break even on the costs incurred and investigate other investment options. If there is a smarter investment option available, consider keeping the money that would be lost to refinancing fees as cash in hand to invest elsewhere. Many fees are negotiable, and lenders may acquiesce if one is persistent in demanding that certain fees be waived.
Early Redemption Penalty
In addition to the fees associated with mortgage refinancing, there may be penalties incurred on ending the old home loan early. If the mortgage term is not up on the original home loan, one may have to pay an early redemption penalty in order to draw up a new loan at the offered fixed interest rate. Again, weigh this amount against the overall amount of money saved by refinancing at a lower rate, and factor in alternate investment opportunities, to calculate if the new rate is worth the penalty.
Bad Credit Report
If one’s credit report has significantly faltered since the signing of the original home mortgage, it may be a good idea to stick with the standard variable rate than to refinance a home loan. Lenders will be unwilling to offer low fixed rates or any stable plans to borrowers that represent a high risk investment. One may end up with a higher rate and a longer amortization period than hoped for if one’s credit report has suffered recently.
Longer Mortgage Repayment Period
Mortgage refinancing may result in an increased amortization period—the length of time required to pay off the home loan in full. Though the amortization period can be shortened, most families don’t have the resources to increase monthly payments to pay off the mortgage faster. Most often, mortgage refinancing results in a longer amortization period. This impedes financial independence for an even longer period of time.
More on Home Loan and Mortgage Refinancing
Mortgage refinancing is an extremely complicated process and should not be rushed into. Consult with a broker if the fees are reasonable, and get various professional opinions on the matter. Everyone’s financial situation is different, and very complex. Look at all the variables before moving forward.
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Advantages of Home Loan and Mortgage Refinancing
Mortgage Debt Reduction
Best Home Mortgage Refinancing Rate
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