During this era of economic uncertainty, it’s not surprising that homeowners in Texas are opting to refinance their mortgages. The growing number of adjustable-rate mortgages due to reset in the coming years also pushes some homeowners to refinance while their rates are still manageable.
After all, refinancing your mortgage will give you more flexibility in your monthly payments. So this can definitely be an attractive offer. But before you refinance your mortgage, it’s essential to weigh the costs against any potential reward.
Mortgage refinancing brings its own set of pros and cons that need to be carefully considered before starting to negotiate with mortgage lenders in Texas. So here, we will be familiar with the pros and cons of refinancing your mortgage.
Advantages of Refinancing Mortgage
Home Equity Line of Credit (HELOC)
Many homeowners also choose to refinance their mortgages so that they can take advantage of a home equity line of credit, or HELOC. A HELOC is essentially a second mortgage secured by your home that you can draw funds from as needed. Many local mortgage lenders will allow you to borrow up to 80% of the market value of your home. If you want to borrow $10,000 to buy a new living room set, you can take out a HELOC and use it as a second mortgage.
Refinance to getting cash
Still, other homeowners refinance their mortgages to get cash. For example, if you recently inherited $20,000 and you want to put it in the bank, but you’re currently upside down on your mortgage (i.e., you owe more than your home is worth), you may want to refinance to pay off your existing mortgage and then take out a new one. This way, the bank will give you a new loan in the amount of $20,000, and you’ll get to use the money.
Lower Interest Rate
The number one reason that people refinance their mortgages is to get a lower interest rate. For example, if you are currently paying 7% on your mortgage, but the current market average is 4%, it makes sense to refinance. A thought continuously wandered “How to save money on my mortgage?” So with mortgage refinancing, you can save thousands of dollars over the next few years simply by refinancing your mortgage.
Lower Monthly Payments
Finally, many homeowners refinance their mortgages because they want to lower their monthly payments. A lot of times, this is due to a change in life circumstances.
For example, you refinanced your mortgage when your kids were young (so that you could afford the larger house), but now they are off to college, and you need a smaller home. Or, maybe you refinanced when your spouse was still working (so that you could afford the larger house), but now they are retired and need a smaller home. A lot of times, you can lower your monthly mortgage by refinancing to a shorter term.
Disadvantages of Refinancing Mortgage
However, not everything is rosy when it comes to mortgage refinance. Here are some things to consider before you start negotiating with lenders.
Losing Your Tax Breaks
One of the main disadvantages of refinancing your mortgage is losing many of your current tax breaks. For instance, if you carry out a loan to pay for your home and you have been paying the loan back diligently each month, you may be able to deduct the interest on your taxes.
However, you lose this tax benefit when you refinance your mortgage because it is considered “double-dipping.” Similarly, if you refinanced your home at a lower interest rate, the IRS will consider this amount to be income. So, when you go to file your taxes, you will have to pay taxes on the difference.
Fees
Refinancing your mortgage is not without costs. If you are refinancing for a lower interest rate, then closing costs will probably be cheaper. However, if you are refinancing for a home equity line of credit or cash out, closing costs will be much higher.
Risk of Losing Your Home
Another disadvantage of refinancing your mortgage is that you will be putting yourself at risk of losing your home. If for some reason, you were to stop paying your mortgage (or your HELOC), the lender in Texas could potentially take possession of your home and sell it to get the money back.
Hence, you should only refinance your mortgage if you are absolutely certain that you will stay in your home for the entire length of the loan.
Legal Issues
When you are refinancing your mortgage to lower your monthly payments, you will have to be able to prove that you qualify for the lower interest rate and that your current loan is unaffordable. Otherwise, you could face legal repercussions from your lender.
Conclusion
Refinancing your mortgage is a good idea in many circumstances. It can reduce your monthly payments or provide you with cash to pay off other debts. However, if you are looking at a HELOC or cash-out refinance, the disadvantages may outweigh the advantages. So, before making any hasty decisions, you may want to do more research on your options.
If you wish to put your step forward in refinancing your mortgage, contact mortgage lenders in Texas to help you sort it out!
