Pros and cons of mortgage refinance

Pros and cons of mortgage refinance

A mortgage is a key debt instrument in the financing arena, as it provides a quick loan to the borrower against the property and is a security to the bank. Typically, the large businesses and individuals use the mortgage as an option for large real estate purchases, without making payment of the full value. The bank is also comfortable in providing money to the borrower, as in case if the borrower stops paying the mortgage, the bank has the authority to take control of the mortgaged property. Mortgage refinance is an important process in the debt sector, which allows the borrower to replace their mortgage on their property with a new mortgage. This process helps to provide new money to the borrower and pay off the original mortgage with the better terms.

Understanding mortgage refinance
Let’s consider this example to understand mortgage refinance. Adam has a mortgage for $500,000 with Bank A at an interest rate of 8%. He found that he could obtain a mortgage for the same amount with Bank B at an interest rate of 5%. Now he takes a loan with Bank B for $500,000 at an interest rate of 5% to pay off the debt of Bank A, which means that he is under no obligation to Bank A. Now Adam is required to pay Bank B only.

Mortgage refinance cannot only be used to pay off the original debt, but it can also be used to pay off other debts. However, in this case, the homeowner should have sufficient equity in real estate.

Pros and cons of mortgage refinance
Starting with the pros of mortgage refinance, if the interest rate is less than the original mortgage, the homeowner can save a significant amount of money and tend to pay less monthly installments. In the long run, mortgage refinance is helpful as the borrower will pay less each month and save extra cash. This cash could be put towards the short and long-term saving goals.

The cons of a mortgage refinance is that there are many closing costs involved while closing the original mortgage such as title insurance, attorney fees, appraisal fees, and some other costs have to be paid again. In case if the original mortgage was recent, then the lending institution waives some of the fees.

It would be a wise step for the borrower to determine the closing costs and other fees associated with the mortgage refinance to get the best deal and save money. However, the amount of interest saved is higher than the closing costs, which is a plus point for the borrower. Therefore, the borrower can consider a mortgage refinance as an option.