Risks of Refinancing a Loan or Home Mortgage

Refinancing a mortgage or loan is the process of changing the loan terms. People refi car loans and home mortgages for different reasons. Often, borrowers are stuck in a variable rate mortgage and want to switch to a more stable fixed rate. Home owners may want to cut their monthly payments by extending the length of the loan, for example, from 15 to 30 years. Car buyers may want to shorten the length of the loan.

Whatever the reasons for refinancing loan, there are risks as well as rewards. If you are unsure about the negatives, the guide below will help you evaluate the risks of refinancing a mortgage.

Look at your latest mortgage statement to find your current monthly payment, and how many more months you have to pay. This is your baseline for calculating the risks of refinancing with different terms. Also look to find out the amount of principal that is yet to be paid. If you refinance later, this is the amount that you will finance, not the original price of the home.

Next, use a mortgage calculator to recalculate your monthly payments under various terms.

For example, see what your monthly mortgage payments would be if you refinanced at a rate of 6% over 30 years, or 7% over 15 years. Compute the total amount to be repaid by multiplying the monthly payments by the number of months in the loan period.

Compare the numbers to get a general idea of your monthly savings or total savings down the line.

Also compare the upfront fees to the savings. No mortgage refinancing package comes without fees, and often these upfront legal fees can eat up the savings. Compare the offers of different lenders to get an idea of how much extra you must pay after signing the papers.

It is important to consider your current credit rating when you approach a bank or lender for refinancing. Your credit history will be investigated once again when you negotiate new loan terms. If your credit or employment has taken a turn for the worse since you first took out a loan, you may not be able to get better loan terms. If you don't want your credit history explored, you should reconsider doing a refi.

Talk to multiple lenders before you make a final decision. You may receive a discount or fee waiver if you refinance with the same company that holds your current home or auto loan.

© Had2Know 2010