Refinancing has some definite advantages. It replaces your original mortgage with a new one with better terms. The most powerful driving force to opt for refinancing is to take advantage of the low rate of interest prevailing in the market place. There are certainly some distinct reasons to opt for refinancing but at the same time there are some strong reasons for not to opt for refinancing. Sometimes the borrowers become so much focused on saving money that the shortcomings associated with refinancing get neglected. But there are certainly some downsides of refinancing too. Here we discuss about some strong reasons associated with not to refinance.
Closing costs may be too high
You may take advantage of the low rate of interest through refinancing. Low rate of interest implies that your monthly mortgage payment amount will be reduced. But the closing costs associated with the new mortgage loan may be too high. Before opting for refinancing, you need to take into consideration the closing costs too.
Extension of the loan term
Another possibility of refinancing is the extension of the term of the loan. In the mortgage industry, the standard and commonly used mortgage is the 30-year fixed rate mortgage loan. You may have already serviced the loan for say 5 years to 7 years and you may want to refinance it for a new 30-year fixed rate mortgage loan. Here the mortgage rate is reduced as the term of the loan is extended. Reduced mortgage rate means that the monthly mortgage payment amount is lowered. This actually helps you make the monthly mortgage payments relatively easily. However, you need to check the total costs associated in refinancing over the term of the loan. Over the long run you actually end up paying more.
Opting for refinancing with damaged credit
One crucial factor to get approved for mortgage refinancing with better rate is your credit score. If your credit score is less than perfect then you still may be offered a refinancing opportunity but not at a very lucrative rate. In the current scenario when the mortgage rates are hovering around historical low values, you may be tempted to opt for refinancing without much bothering about your credit score. But before opting for refinancing, you must put in serious efforts to improve your score so as to get the best rate. If you do not have serious blemishes such as major defaults, bankruptcy, it would not take much time to improve your credit score. So, before making any plans to refinance your mortgage loan, you must put in serious efforts to improve your credit score so as to get the best rate.
Shortening the term of the loan too much
You may want to pay off your mortgage loan much faster. In order to do that you may want to refinance your 30-year fixed rate mortgage into a 15-year fixed rate mortgage. This invariably increases mortgage rate as well as the monthly mortgage payment amount. Increased monthly mortgage payment amount may put huge financial pressure on you.
So, it is advised that before opting for refinancing, you must seriously take into consideration the pros and cons associated with mortgage refinancing.