It is unfortunate that many people, having determined that obtaining home refinancing is a panacea for all their financial woes will charge ahead without adequate consideration of the true cost of the house refinancing. Considering the disadvantages will not require a great deal of effort and may not change your ultimate decision, but at least taking a second look at both sides of the picture may prevent you from making a disastrous financial mistake. Only you can determine whether the disadvantages of obtaining a restructured loan are overshadowed by the financial necessities or desires of your family.
Time to repay
One of the disadvantages involved in obtaining home refinancing is that your mortgage term is adjusted. Typically this will extend the repayment period and thus cause you to pay more in interest costs, even if the interest rate is lower. The only way to be certain is to prepare an amortization schedule using various combinations of rates, terms and other factors to see how it affects the total cost and the repayment term length. Occasionally, a refinancing loan is completed in order to shorten the repayment time which usually is an advantage, rather than a disadvantage, since your debt is cleared in less time. This may have the effect of increasing your monthly payment amount.
Additional costs
A strong disadvantage when you obtain a house refinancing loan is that of adding to the costs of your housing. The loan itself may not be a large one, but if you extend additional interest costs over the term of the loan, you will often find that there is a significant impact on your budget and on the cost of your use of money. In addition to interest costs, you will also pay points in many instances plus the origination fees and other broker or lender related expenses.
Declining market
Be very cautious of trying to obtain home refinancing if you live in a community or neighborhood where the housing prices have been declining. The same statement holds true if your neighborhood is slipping into shabbiness. An obviously declining value for your home can result in a home that is over mortgaged with no foreseeable way of righting the balance between loan value and equity in the home. A declining neighborhood will probably make it difficult to sell the home should you decide to do so. You may be wiser to look at some creative financing
in order to use the existing equity in your home to get into a better home.
PMI
Obtaining home refinancing can be a positive thing, but it can also provide a danger of charges and expenses that you had not planned for. One of these is private mortgage insurance or PMI. When a loan to value rate drops below 80% with most lenders, the lender may require that private mortgage insurance be added to the cost of the loan. This is to protect the lender from the danger of default on the house refinancing loan where there is little or no equity left on the loan. Private mortgage insurance can cost hundreds of dollars extra.
