If you are thinking about refinancing you need to be aware of the possible penalties, risks of refinancing or clauses the banks may hold on your old mortgage.
Most mortgages contain penalties within the mortgage if you decide to pay down your mortgage or if you decide to pay your mortgage out completely. You need to weigh the advantages or disadvantages of refinancing. Let's say you have a fixed mortgage with a high interest rate, most likely your penalty will be in the thousands of dollars depending on your current mortgage balance. You will need to determine if the savings on interest and reduced payment amounts for your new refinancing will outweigh the penalty costs on your current mortgage.
One option is a longer term for your new refinance. This can be very tricky also as you will start to accrue more interest payments as the length of your mortgage was extended.
Another risk of refinancing is payouts or pay down of unsecured debts. The reason you may be refinancing is the pay down or payout of unsecured debts. These are debts such as car loans, unsecured lines of credits, credit card debts, and payments of previous legal fees. Although this may seem like a good idea, I would say almost ninety percent of people will accrue new debts within the next six months. If you are good with money then you will not need to worry about this, but if you spend money easily you could be in the same boat only months down the road and you are now incurring higher interest costs as you just extended your mortgage.
The cost to refinance your mortgage is not cheap. Refinancing your mortgage can be very cost due to legal and bank fees. Should you find yourself in the situation of refinancing you may want to wait until different mortgage companies are offering no or low fee refinancing. Although it might not be a lot, you could save yourself several thousands of dollars in the long run.
The last risk is the open mortgage choice. An open mortgage allows the borrower at any time before the contract has expired to payout or pay down their existing mortgage without any asserted penalties. Most open mortgages are generally only for 6 months to a year. There is a huge downside to this option though. Beware of the ever changing mortgage rates. If you chose an open mortgage then you do need to keep due diligence by keeping a close eye on the banks interest rates. If you see that the bank rate is steadily increasing then you should switch to a fixed mortgage.
In all when choosing to refinance you should take a look at your current situation and your goals in the next couple years. There are several rewards and returns of refinancing so make sure you educate yourself before you jump in.