When is Mortgage Refinancing a Bad Option?

Advisor June 18, 2021

How does locking in a 30-year fixed-rate mortgage with an interest rate of 5% sound? Great, right? If a financial institution gave you that offer, won’t you be tempted enough to take it right up? We’re sure you would.

Jessica Bryant/Pexels | Refinancing your existing mortgage can prove beneficial, but only if you avoid a few mistakes

It definitely makes a lot of sense to refinance and save your money at low-interest rates. But, it’s truly beneficial only if you are wise about it. There are several factors you must take into consideration before signing a mortgage refinancing agreement. After all, there are situations wherein it isn’t the most logical choice since it may have a huge impact on your financial situation.

In this post, we will take you through the most common reasons why you should be thoughtful before refinancing your home loan.

Extension of the loan’s term

When you consider refinancing, you eventually end up extending the amount of time in which you will have to repay your loan in the coming months. For instance, if you apply for a new 30-year loan in exchange for your existing 30-year loan, the payments are calculated to last for the next 30 years.

Now, if your current loan has 10-20 years of repayment, your remortgage will end up soaring up the interest costs. This is why, when you get a new long-term mortgage, a huge chunk of your payments is diverted towards the interest charges in the early years. But with an existing loan, you might have moved past those years, and your remittance would end up making a relevant dent in your mortgage balance. If you remortgage, remember you have to start from scratch. Therefore, choose wisely.

Karolina Grabowska/Pexels | Refinancing can often extend your repayment time and accumulate more interest than you think you’re going to save

Recourse scores

In some states, property purchase loans have special providence from the creditors. In the course of foreclosure, moneylenders might not be permitted to sue you if they lose funds on your loan and the successive house sale. These legal actions are known as deficiency judgments and trust us when we say this, they can haunt you even after you leave your property!

But remember, these rules are only applicable to your bonafide purchase loan, and refinancing your mortgage switches the nature of your loan. This means it’s no longer the original credit you used in order to procure your home. As a result, you might end up losing some protection.

Cytonn Photography/Pexels | You should know the loopholes and backdoors lenders can use against you to avoid paying penalties when refinancing

To sum it up

While the above-mentioned reasons might sound a bit scary, mortgage refinancing can prove to be quite beneficial for many people. So make sure that before refinancing your home loan, you familiarize and educate yourself about how remortgage works. Moreover, don’t forget to take advice from your local real estate attorney.

We hope this post was able to clear your doubts regarding refinancing a mortgage. If you’d like to know more about refinancing or mortgage in general, don’t forget to leave a comment below!