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When mortgage rates are low, you may wonder if it’s an optimal time to refinance your loan. With rates under 3%, now is one of those times! But before you make any hasty decisions, consider the following pros and cons.

Benefits

If you didn’t get the loan process right the first time around, these pros could be tempting.

 

1 - A lower interest rate

The opportunity for snagging a lower rate is the most popular reason for refinancing a home loan. For cash-strapped homeowners, a smaller payment each month could keep them in their home and preserve their credit.

Here’s an example. Let’s say you have a $250,000 home loan. The difference between a 6% rate and a 4% rate on the mortgage is $300 each month. For anyone struggling to pay the bills, $300 every month makes a big difference.

If you need some breathing room in your budget, a lower interest rate could be your saving grace.

 

2 - Turning Equity into Cash

Another top reason to refinance your loan is to turn some of your equity into cash. Equity is the difference between what your home is worth and how much you owe on your mortgage. If you’ve lived in your home for a substantial amount of time, it’s probably worth much more than you owe. Not only have you been paying down the loan principal, but your home has probably appreciated since you bought it.

With a cash-out refinance, you basically take a loan for more than the current balance and receive the difference in cash. Some people use this strategy if they want to renovate the property, pay off other debts, start a business or pay for education.

Remember, there’s a downside to this strategy. You increase your debt load and possibly your monthly payments as well. Additionally, if you’re trading your credit card debt for mortgage debt, you could potentially lose your home if you fail to make payments. Your home wouldn’t be at risk if you simply defaulted on credit card debt.

Tip: Home equity lines of credit provide another way to take equity out of your home. Talk with your financial adviser about this option.

 

3. Change a Variable Rate Loan to a Fixed Rate Mortgage

Some people choose a variable-rate mortgage because it can offer an attractively low payment for the first several years. Once it starts adjusting, however, the volatile nature of monthly payments can be challenging to manage.

Many people who choose variable loans sometimes do so because they don’t think they’ll stay in the home for very long. But life has a way of surprising us. If you still live in the same house and your mortgage is fluctuating more than you’d like, refinancing to a fixed-rate mortgage can even out your cash flow and stabilise your budget.

 

Drawbacks

Refinancing can make financial sense in many situations, but you should consider the disadvantages as well.

 

1. Refinancing Fees

For most, the cost of a new loan poses the most significant hurdle to refinancing. It's important to understand the full suite of charges you may be liable for when refinancing, including:

• Mortgage application fees
• Valuation fees
• Discharge fees
• Break costs
• Settlement fees
• Registration fees
• Exit fees

 

2. The Application

Applying for a new loan takes time and effort. Also, an adverse change in your credit score or income could stop the process in its tracks.

Mortgage lenders will scrutinise your financial information and credit score, searching for evidence that you’re a low-risk borrower. If your credit score has dropped, you might not qualify for the lowest rates. Be prepared to gather all kinds of documents to satisfy your lender’s curiosity. They may require tax information and pay slip verification.

 

3. Low Appraisals

Since you’ve lived in your home for a while, its worth isn’t entirely clear. To figure out how much equity you have, the lender will order an appraisal. To estimate your home’s market value, an appraiser will use recent comparable sales and any data you can provide about the home’s size and features.

Problems occur when the appraisal comes back lower than anticipated. A low-ball appraisal can ruin your chances of acquiring a new loan with superior terms. The appraiser may even conclude that your home is worth less than what’s owed. Generally speaking, it’s best to refinance when your local market has experienced an increase in values.

 

In Summary

Refinancing your home loan can lock in a low rate, reduce your monthly payments or help you to tap your hard-won equity. If you’re current on your existing mortgage and have a respectable credit score, refinancing could be a valuable tool to help you achieve your financial goals.

For more information about refinancing, or to consult with a financial advisor about your unique situation, get in touch with us at Altus Financial.