Related Sponsors

What are the disadvantages of mortgage refinancing?

Home » Real Estate » Mortgage Refinancing » What are the disadvantages of mortgage refinancing?

The potential of reduced monthly payments, increased equity, and immediate cash are tempting arguments in favor of mortgage refinancing. Refinancing, however, is not for everyone. Here are some of the dangers of refinancing your mortgage:

• Higher Short-Term Costs: You're essentially taking out a new mortgage, so you have to pay closing costs and miscellaneous fees all over again. Typically, these costs will be 1-2% of the total loan size. In addition, some mortgages have a penalty clause that you will trigger by refinancing. So-called "no cost refinancing" doesn't include these fees, but it makes up for it in its increased interest rates. Thus, you'll need to make sure that your long-term savings will outweigh these immediate costs; if you're only staying in your home for a few more years, it might not be worth it.
• Higher Long-Term Costs: It sure sounds good to have reduced monthly payments, but if you lengthen the term of your loan and spread out your payments, you'll likely end up paying thousands more over the long haul in interest. Likewise, cash-out refinancing gives you access to thousands in cash, but don't forget that you'll have to repay all that money with interest.
• The Never-Ending Mortgage: If you continually refinance, either for cash or to reduce your monthly payments, you just keep lengthening the term of your loan. Remember, therefore, that it might be better to pay a little extra now and have less to think about twenty years down the road, when you're living on a fixed income.
• Limited Advantages: If you have bad credit, the advantage of a reduced interest rate simply might not be an option for you.

Refinancing has many advantages, but it is tempting to look on refinancing as the solution to your current financial struggles. In the process, you might lose perspective and forget to consider how you'll repay this money down the road and whether the benefits really do outweigh the drawbacks.

Next Page: How do I refinance my mortgage?

Related Mortgage Refinancing Articles