Check These 5 Pitfalls Before Opting For Mortgage Loan Refinance
Refinancing a mortgage is often considered a wise way to reduce loan liabilities. Refinancing offers several benefits like lower EMIs, more cash in hand, faster loan repayments, and better terms. However, loan refinancing is not always as good an idea as you hear from experts. Read on to discover the reasons why you should think twice before opting for a mortgage loan refinance.
Top-5 Reasons Why You Should Not Opt For Mortgage Loan Refinance
Most borrowers think that refinancing is a sure shot way to get the lowest mortgage loan interest rate. However, it is not all that simple. While it is true that refinancing often opens the opportunity to get the lowest mortgage loan interest rates, you can not get the maximum benefits of mortgage loan refinancing due to the following reasons:
1. Your Credit Score is Below Par
Lenders often offer the lowest mortgage loan interest rates to borrowers with a credit score above 800. If your credit score is above 800, you can save a considerable amount on the new loan. But, if your credit score is below 800, the savings from a new loan might not be enough to drive home about. Additionally, if your credit score is low, you can face difficulty in finding a new lender, as they will consider your mortgage loan as risky.
2. The Processing Fees May Be High
When you refinance a mortgage loan to get the lowest interest rates, you might have to pay a prepayment penalty to the current lender and loan processing fee to the new lender. Back of the envelope calculations suggest that the combined cost of prepayment and loan processing may be around 5-7% of the gross loan amount. Hence, it is prudent to calculate the processing fees and find out whether your savings outweigh the loan cost or not.
3. Long-Term Savings May Be Negligible
A mortgage loan refinance with the lowest interest rates may look good on paper, but it may cost you more in reality. Suppose you have paid EMIs for ten years where the loan term is twenty years. It is most likely that you have paid a substantial part of your EMIs as interest, as principal repayment usually starts in the latter half of the loan term. When you opt for a mortgage loan refinance, you have to pay the interest all over again, albeit at a lower rate.
4. Your Property is New
The older a property gets, the more your equity in the property increases. If the property you are mortgaging is new, the chances are high that your equity in the home is not considerable. And, lenders usually do not approve mortgage loan refinance if your home equity is less than 20%. If, however, your home equity is more than 20%, you can get the benefits of a lower Loan-to-Value (LTV) ratio and avail a mortgage loan with the lowest interest rates.
5. You Have Plans to Sell Your Property
You may have invested in a property to sell it with a profit. In such cases, refinancing may not be the best idea, as your loan repayment term will increase. Additionally, it may take some time before you arrive at the break-even point. The break-even point is the difference between the prepayment charges and loan processing fees and the new interest rate.
Conclusion
The bottom line is – you should consider refinancing your mortgage loan if you are sure that the savings are substantial. However, if any of the afore-mentioned points resonate with you, mortgage loan refinancing with the lowest interest rate might not be a wise decision.
