Pros and Cons of Home Loan Refinancing

Have you ever considered how home loan refinancing can save you money and improve your standard of living? There are many ways in which home loan refinancing can help homeowners financially. Refinancing your home is an effective way to access your home’s equity, consolidate debt and improve your standard of living.

There are two different types of home loans rates: fixed and variable, and there are both pros and cons to each type.  When to finance is another big worry for individuals. In addition, there are advantages and disadvantages to switching from one type of mortgage to another, or refinancing your mortgage. 

Pros of home loan refinancing

Ease your financial strain:
House refinancing can reduce the term of your mortgage or enable you to pay a lower interest rate. If your original loan term was 30 years and you have been making payments for several years, it might be wise to change to a mortgage with a shorter term, perhaps 15 or 20 years, and a lower interest rate.

Improved loan period:
In addition to lowering your rate, refinance reduces the length of your loan. In the first years of a 30-year loan, you’re paying almost all interest—it’s not until the later years that you start paying principal. 

Access to your home’s equity:
Your home has likely been steadily increasing in value since you purchased it, and house refinancing is a way to access this equity. Many people wait until they sell their homes to make use of the accumulated equity, but refinancing your property gives you the opportunity to use it now.

Consolidate debt:
House refinancing is often used as a way to consolidate debt and reduce the amount of interest that is being paid on existing debt like credit cards etc..Refinancing of housing loan can help in winding up the credit card loans. 
                                        Should you repay home loan or invest?

More leverage: 
Since so many loan providers are offering low rates right now, you’ll have more negotiating power to get a better deal. 

Cons of home loan refinancing

The cost of refinancing can offset the savings you’ll get on a lower monthly payment under your new loan. Look carefully at the refinancing fees to make sure your savings will pay back those costs in a reasonable time frame. 

Few people qualify:
Banks are being more selective about refinancing. People with even average credit scores may start the refinancing process but be rejected or pay a higher rate once banks check their credit scores

Prepayment penalties:
Your original loan may include a penalty for paying it off early, which includes refinancing it. You should include the costs of any penalty in calculating the time it will take you to break even on the refinancing. 

Risk of rise in interest rate again:
Even though enough efforts have been done in refinancing of your mortgage , chance are the rate of interest may go up keeping in view the change in Government policies.

Paperwork, paperwork:
You have to suffer a little more to get lower rate which means completing a lengthy loan application that allows for a complete review of your finances and employment history, including providing recent income tax returns, pay stubs, investment and loan statements, and proof of checking and savings account balances etc..