Maybe you're so over your current interest rate. Or perhaps you're basking in the the glory of your ridiculously low rate but are wondering if there's a cheaper interest rate just waiting for you to claim it. While it's often a smart idea to consider refinancing when rates head south, there are some disadvantages, too. Before you sign on the dotted line, you have to consider if a refi is right for your bottom line.
Advantage: Reduce Your Monthly Nut
Face it: You could use a few extra bucks in your pocket at the end of the month. When you refinance your mortgage at a lower rate, the money from your new mortgage pays off the debt on the existing one. If you get an amazing rate, you can reduce your payments each month, often by a couple hundred bucks, depending on how much your home is mortgaged for. Another way to save some cash is by dumping your private mortgage insurance. This only works if you originally put down less than 20 percent on the original note and your lender forced the mortgage insurance on you. If your refinanced loan is less than 80 percent of your home's current value, you don't need the mortgage insurance.
Advantage: Cash Out
If you have a chunk of equity in your home, you can cash out and use the money any way you want. Perhaps you want to pump up the testosterone level in your house with a man cave. Or maybe the gal of the house wants a new powder room. You can pay off high interest credit cards or use the money for whatever you want, including investing in another property.
Disadvantage: Closing Costs
Nothing in life is free. This is especially true with your new mortgage. The costs involved in a refinance may be comparable to what you paid for the original loan, depending on which lender you go with. There's the appraisal fee, title insurance, discount points and origination fees. Throw in the application fee, recording fee, credit report and flood certification, plus a couple other miscellaneous fees and the amount is substantial. Of course, you can always roll these costs into your refinance, so all you may have to pay is the upfront fee for the application. But you must stay in your home long enough to recoup your refi's closing costs or it may not be worth doing. You should stay put for at least two to three years or your closing costs will suck up any savings you have from a lower interest rate.
Disadvantage: Losing Equity
As for that man cave, if you cash out some of the equity in your home to build it, you will own less of your home, which can be a big deal if you get underwater with your loan. The last thing you want to do is max out the loan to value of your property in a downward real estate market. You must practice some restraint with regard to your equity, or you could be up a creek without a house in the future. Another potential bummer is that unless you refinance to a shorter mortgage term, you essentially set your loan back to square one, from which you would be looking at 30 more years of payments.
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