Mortgage refinancing involves a process in which you acquire a new mortgage and use its proceeds to pay off the previous one. There are various reasons why homeowners opt to refinance their mortgages. These reasons include availability of reduced interest rates, a shorter mortgage term, or a possible conversion from an adjustable-rate mortgage to a fixed-rate mortgage or vice versa.

While mortgage refinancing has its own set of advantages, it also presents some risks to a prospective home buyer.

Why Should You Do It?

Reduce your Interest Rate: The interest rate of your mortgage is directly linked to the size of monthly payments on your mortgage. If you refinance your mortgage, you may be in a position to get a lower interest rate due to the current economic market conditions or your improved credit score. A lower interest rate implies that you have to make lower payments. It also enables you to build your home equity at a faster pace.

Adjusting Mortgage Term: You can either increase or decrease your mortgage term by simply refinancing your mortgage. If you opt for a mortgage with an increased term, your monthly payments are reduced. However, it increases the duration for which you make mortgage payments. On the other hand, decreasing your mortgage term will make you pay off your loan much sooner, but you have to pay more each month.

Switching Between Fixed-Rate and Adjustable-Rate Mortgages: Though ARMs initially offer lower interest rates, their periodic amendments can result in greater rates as compared to fixed-rate mortgages. Mortgage refinancing provides an opportunity to switch to a different kind of mortgage to enjoy some relaxation and peace of mind.

Why Should You Not Do It?

Higher Costs: There are various costs involved in refinancing a mortgage including the title insurance, origination charges, appraisal fee, and discount points. These costs can be easily compared to what you pay for your actual loan. Furthermore, there are substantial costs involved in the form of other miscellaneous charges as well.

Lengthy Procedure: You can either continue with your existing lender or find a new one to refinance your mortgage. In both situations, you have to go through a lengthy procedure. It implies that you have to fill out a new mortgage application and also qualify for it. It involves different steps that lenders take to assess your credit history and income sources.

While often turning out to be a smart idea, refinancing can also put your finances at risk. Despite the popularity of mortgage refinancing, you should earnestly consider the present market situation and offered products before deciding to refinance your home loan.