The Disadvantages of Refinancing

There are clear advantages to a mortgage refinance, such as the possibility of acquiring a lower interest rate and a lower monthly payment. But before contacting your mortgage lender and completing a home mortgage refinance application, it is wise to consider the possible disadvantages of a refinance.

Qualifying for a New Mortgage Loan

You can choose to refinance with your current lender or select a new lender for your mortgage loan. However, having a prior mortgage loan doesn't automatically qualify you for a mortgage refinance. A mortgage refinance creates a new home loan, wherein your new lender pays off your old mortgage loan. Even if you've had a good relationship with your existing lender and never missed a payment, you'll have to complete a new home loan application and requalify for the mortgage. Thus, you can expect lenders to review your credit and income. A drop in credit rating or income can result in a loan denial.

Higher Monthly Payments

Refinancing and acquiring a lower interest rate on your mortgage can reduce your monthly payment. However, some homeowners refinance with the purpose of obtaining cash from their equity. Money from a cash-out refinance often is used for home improvements, debt consolidation and college tuition. Although lenders take this money from your equity, you're expected to repay the loan, and lenders wrap the loan into your new mortgage balance. Taking cash from your equity increases your mortgage balance. And depending on the amount borrowed, you can anticipate higher monthly payments after completing the refinance.

Expensive

Refinancing requires on-hand cash to close on the new mortgage loan. Aside from closing or settlement costs, which are about 6 percent of your mortgage balance, you'll need money for a home appraisal and application fee. You might be able to avoid paying your closing cost out-of-pocket if you ask your lender to attach this payment to your mortgage balance. But again, adding money to your mortgage balance increases your monthly payment.