Refinancing your home loan is an effective way to obtain a much lower mortgage rate. On top of that, you can also shorten your term to save even more on interest in the long run. If you qualify for it, it would guarantee significant savings, right? Not so far.
As with anything in the mortgage realm, the value of a refi to a borrower is relative. To determine whether it makes financial sense for you to apply for a mortgage refinance in Utah, Wyoming, or Idaho, Altius Mortgage Group recommends considering these first:
It Comes with Closing Costs
Processing a refi isn’t free. All parties responsible for executing it must be paid by you. You may have the option to roll all closing costs into your new loan to avoid dealing with them up front. Or, you may be able to skip them altogether in exchange for a higher interest rate. If you opt for a no-fee refi, it might diminish the benefit of refinancing in the first place.
It Resets the Clock
The refinanced mortgage would essentially refresh the amortization schedule. If you’ve already paid 10 years in your current loan, it would restart to month 1. As early payments go toward the interest, it might take a while before you can reduce your principal balance significantly. In turn, you can’t build equity on your property unless you make additional payments or it appreciates in value over time.
Further, it could take you more months or years to free yourself from your PMI payment obligation (if your principal balance has yet to reach 78%). It may be less than before, but it would nevertheless add up.
It Affects Your Creditworthiness
You could see a credit score ding after applying for a refi. It means it could decrease from five to 10 points. However, its impact is minimal and fleeting. What’s long-lasting, however, is the effect of closing your old loan to your credit history. The moment it becomes inactive, it would become less beneficial to your creditworthiness as time goes by.
Weigh the perceived benefits of a refi against its potential drawbacks before pulling the trigger. Do the math meticulously to ensure your costs wouldn’t eclipse your savings.