Falling interest rates often entice homeowners to refinance mortgages, but interest rates are not the only variable to consider when looking at a new home loan. Many mortgage refinancing plans come with myriad processing fees and end up adding to the principal at the end of a loan and extending the term of the loan, which ties up money that might be more fruitfully invested elsewhere.
Mortgage refinancing is a complicated process, and there are many elements to consider before signing off. Weigh these financial costs and benefits when considering a change in mortgage plans.
Mortgage Refinancing Fees
The major drawback to refinancing a home loan is the additional loan fees tied up in the process. Lenders and brokers are in the business of making money, and will charge you at every possible turn. Drawing up a new mortgage may incur any number of procedural costs—processing, administration, application, inspection, document preparation, appraisal, credit report, notary, recording, etc.
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 mortgage loan contract and compare them to the money saved in interest over the full course of the refinanced home loan.
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 fees as cash in hand to invest elsewhere.
Drawbacks of Home Loan Refinancing Costs
Many fees are negotiable, and lenders may acquiesce if one is persistent in demanding that certain fees be waived. This is important because if one considers the costs of refinancing a mortgage as essentially rolled up into the cost of the loan itself, the end result is a larger mortgage overall. This can jeopardize one’s equity position.
Also, refinancing a home loan 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, refinancing results in a longer amortization period. This impedes financial independence for an even longer period of time.
Mortgage Refinancing Benefits
The obvious benefit of refinancing a home loan at a lower interest rate is the potential to pay less in the long run, and even to reduce one’s monthly payment rate. If one adheres to the new plan long enough to break even on the fees incurred during the process, there will be money saved in the long term and more liquid cash flow each month to invest elsewhere.
If one has gained the means, one might also consider shortening the amortization period on the mortgage by increasing the monthly payment at the reduced interest rate. This can save even more money in the long run, and by shortening the overall length of the home loan period, one can experience true financial independence earlier in life.
More Mortgage Refinancing Advice
Refinancing a home loan can lead to more cash in hand both on a monthly basis and in the long term to reinvest at a high rate of return in other investment options. But be wary of the fees incurred during refinancing a mortgage and the new terms of one’s home loan. Besides the aforementioned costs and fees, there are many more minute details included in every mortgage plan, and professional assistance should always be sought when dealing with important financial decisions.
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