Below are some drawbacks of refinancing that you may want to consider before you apply. It may not reach the break-even point. The savings may not be worth it. It could reduce the equity in your home.
The number one disadvantage of refinancing is that it costs money. What you're doing is applying for a new mortgage to pay off your old one, so you'll have to pay most of the same closing costs that you had to pay when you first bought the home, including origination fees, title insurance, application fees, and closing charges. One of the first reasons to avoid refinancing is that it takes you too long to recover the closing costs of the new loan. This period is known as the break-even period, or the number of months it takes to get to the point where you start saving.
At the end of the break-even period, you fully offset the refinancing costs. In fact, you'll most likely have to pay thousands of dollars in closing costs, including loan origination, appraisal, and title insurance costs. However, before exploring this option, it's important to know that refinancing a loan can affect your credit by temporarily reducing your credit rating. However, since refinancing can negatively affect your credit rating, it's important to carefully evaluate the benefits versus the costs before you start looking for a new loan.
