If you are thinking of refinancing your home loan, you must first know the disadvantages of doing so. When you get a refinance loan, you basically make a new loan so that you can pay off your original loan. But here are the disadvantages:
• Costs – When you pay fees to get a loan, it means it will cost money to get a loan. This also means that you may not recoup at lower interest rates for years. Now, the only way to figure this all out is to add up the fees. Get the difference between the old payment and the new payment that you are making. Then divide the difference so that you can get the loan fees. These loan fees should equal the number of months you must pay until your new loan breaks even.
• Amortization – In a case like this, your amortization period will be much longer. You have the option of making it shorter but you might not qualify for the higher payment to begin with. You might also want to pay off the loan faster by paying more each month. So, if you refinance a loan that has 25 years remaining on it and you use a 30-year loan to do that, you will end up with a loan that will last 35 years to pay off.
• Mortgage – This will be larger in the case of refinancing home loans. This is because rolling the costs of the loan on a loan in itself will make it bigger and this can really harm your position in equity.
By: Elijah James
Posts Tagged ‘Loan Fees’
Refinancing Home Loans – Some Disadvantages
March 23rd, 2010Refinance Home Loan – Benefits You Do Not Know
December 7th, 2009
When the borrower on a home mortgage has come to a position where the terms of the original loan are unacceptable, or more expensive than they need be, given the current economic condition, the borrower sometimes chooses to refinance home loan. In this situation, the original loan is paid off and the loan is replaced with a new loan the terms of which can be similar or can be quite different. In many ways, a refinance loan is like a brand new loan obtained from scratch since the loan equity, appraised value and capacity to repay must be approved by the lender.
Smaller payments
When you decided to refinance home loan, you may be able to structure the loan in such a way as to receive payments that are smaller. This can be very beneficial if your goal is to tighten your belt due to a reduction in income. Sometimes those who are entering retirement years will desire to stay in the same home, but will be living on reduced income, so prefer to reduce expenses to match. Smaller payments on a refinance may be due to a better interest rate that can be gained. If interest rates have dropped enough to offset the refinance loan fees added to a new loan, you may be smart to refinance.
Longer repayment time
One of the benefits that can be arranged when you refinance home loan is taking longer to repay the debt. This is desirable if you want to obtain a larger loan in order to pull out some cash at the time of closing. It may be for the purpose of lowering your monthly payment. Spreading out the same size loan over more years means that the interest paid will be greater, but the payment made will be more manageable in size for the homeowner.
Fixed payment
Another benefit that many borrowers find when refinance home loan with a fixed rate option is that the repayment amount remains the same from month to month. If the proceeds from the home loan have been used to get cash out, it is likely to be cheaper than obtaining personal loans, or maxing out the balances on the credit cards. Once the loan is set, the payment amount remains the same from month to month throughout the course of the loan.
Pay off debts
When you receive cash out amount as part of the home loan refinance, there are many uses for the lump sum cash. You can pay off troublesome debts, particularly those with large interest rates. This will free up available cash for your living expenses or that you can apply to pay down other debts. A refinance can allow you to pay for future expenses as well, such as covering college tuition costs for yourself or for family members. You can use the funds to renovate or do major repairs on the home that you live in. You may even use the funds to take a long desired vacation or holiday trip.
By: Alan Lim