Disadvantages of Refinancing
1. Increased Monthly Payments: In refinance, borrowers tend to shorten their period for repayment of loans. Shortening the repayment period will have a direct impact on the monthly payment. The monthly payment of the person will likely increase due to this.
2. Minimal Savings: The process of refinancing includes various costs and a lengthy process. The benefit of saving from the refinancing can be minimal which might not be worth the efforts put into the process. Hence, it is not always necessary that a person will get an overall advantage of refinancing.
3. Penalties: Some existing loans may have prepayment penalties that can reduce the potential savings if not considered before refinancing. Prepayment penalties are imposed for paying off the loan early. These penalties should be considered in the cost-benefit analysis.
4. High Cost: It is one of the major drawbacks of the refinancing process. There are various costs involved in the process of refinancing such as the cost of closing the loan, loan origination fees, cost of other paperwork, etc. These costs must be considered before refinancing.
5. Impact on Credit Score: The process of refinancing may have a temporary negative impact on the credit score of the person. The impact must be considered by the person if he is planning to take other loans.