Mortgage Refinancing: What are the Pros and Cons?

Mortgage Refinancing: What are the Pros and Cons?

Mortgage Refinancing: What are the Pros and Cons?

The mortgage solution you selected months or years ago could’ve been your best choice back then, but what if the market, your situation, or your goals have changed? A more competitive mortgage product may be the answer.

Refinancing could be changing the rate and term on your current balance, or it might be accessing the equity you have in your real estate holdings by restarting with a new term and higher balance. Whatever the case, risks and benefits exist for any mortgage refinancing.

Pros of refinancing your mortgage

Whether it’s a home or an investment property, a mortgage is a substantial financial burden. Refinancing a mortgage can help unlock better potential or secure better terms like the following.

Take advantage of lower advertised rates

The most obvious benefit to refinance a mortgage is to secure a more competitive interest rate than you currently have. Depending on the mortgage value and term, scoring a lower interest rate can save hundreds or even thousands of dollars per month in interest charges. Even when lowering the payment isn’t the concern, it’s prudent to pay as little interest as possible.

Adjust your mortgage term

Should economic conditions like a pandemic stretch your ability to pay your mortgage, refinancing your mortgage could give breathing room. For example, if you have 20 years left on your amortization with challenging payments, refinancing over a 30-year period will alleviate pressure.  That’s true even if you only qualify for a higher interest rate in some cases.

Ability to cash out

Unlock the equity in your real estate holdings by refinancing. Depending on the type of mortgage product you need, you may be able to refinance your mortgage to access the money you have tied up in a property. Whether it’s to invest in another property, double down on a bullish stock market, or pay off bills, cashing out with a mortgage refinance could be of assistance.

Maintain maximum leverage based on LTV

For those with a keen eye on leveraging their investments, refinancing is a great way to position your business or personal portfolio based on loan-to-value ratios. Your highest potential may be to keep your mortgage or mortgages at the maximum LTV ratio to reinvest equity elsewhere. Although it’s an aggressive stance, you can put your equity to work, earning more than the interest you pay on the mortgage itself.

Cons of mortgage refinancing

If you’re considering a mortgage refinance, be aware of the possible challenges you could face. There are a few hurdles you may need to overcome.

Penalties can potentially be high

Explore the terms of your current mortgage to understand what it will cost to refinance. Your current lender may require payment equivalent to 3 months’ interest charges or a fee based on interest rate differentials, for example. There are also closing costs, legal fees, and appraisals to consider. Weigh the cost of refinancing to determine if your goals are met before you proceed.

You could pay more interest

By refinancing over a longer term, your total interest paid is likely to be higher. It could make it more comfortable to maintain your payments in the meantime but consider the interest costs over the term before refinancing.

You may lose out on more aggressive rates

Current mortgage rates to refinance may look better today than they did when you secured your mortgage. But what happens if rates continue to slide? Should mortgage interest rates decrease further, locking in on an ARM or fixed rate mortgage today could mean you lose out on future savings, so consulting a mortgage professional before a refinance is crucial.

Mortgage insurance may be necessary

Are you seeking a mortgage refinance with an LTV higher than 80% on a non-conforming mortgage? If you are, you may need to also purchase independent mortgage insurance. Although it’s commonplace, it’s an extra cost you should consider.

If you’re considering a mortgage refinance as a self-employed homeowner or investor, MBANC can help you discover if now is the right time. With products specially designed for non-QM borrowers, our experts can give you advice and see if you qualify for a mortgage refinance today. 

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