Most homeowners will consider refinancing their home at some point. When you refinance your mortgage, you take out a new loan and use the proceeds from it to pay off the remaining balance of your existing loan. Although refinancing your mortgage may not be a viable option for every homeowner, it may be of use to people with the following goals:
- Get a lower interest rate. If interest rates have fallen since you originated your first loan, you may refinance to take advantage of a lower interest rate.
- Borrow money. If you have equity in your home, you may refinance in order to borrow additional money for a renovation or major purchase
- Switch to fixed-rate. If your original loan was an adjustable rate mortgage, you may refinance in order to have a fixed rate mortgage
No matter what your reasons are for refinancing your home, you will want to understand the pros and cons before making this decision. To help you decide if this is right for you, here are some advantages and disadvantages of refinancing your home:
There are several ways that refinancing your home may be beneficial for you and your family. They include:
- Shorter loan period. Shortening or extending the repayment period.
- Mortgage consolidation. Consolidate multiple mortgages on a property into one loan.
- Lower rate. Reducing your interest rate.
- Get cash. Take cash from the loan to spend, invest or pay off other debts.
- Lower risks. Avoid the risk of rising interest rates by going from an adjustable mortgage to one with a fixed-rate.
- Drop PMI. Reduce or eliminate private mortgage insurance if the value of your home as increased.
- Faster payoff. In certain cases, refinancing your mortgage may allow you to pay it off faster than the old loan would.
While refinancing a mortgage has its advantages, it may not be right for everyone. If you are not careful, refinancing your home may end up costing you more money than you would actually save.
To help you avoid making this mistake, here are a few disadvantages to consider before refinancing your home:
- Refinancing can be expensive. Fees and closing costs can quickly eat into the savings you might gain through refinancing.
- Interest rates may potentially increase. Homeowners who refinance from a fixed-rate mortgage to an adjustable rate mortgage may face higher interest rates.
- Payoff fees. In some cases, homeowners my face penalties when paying off the existing mortgage.
- More debt. Removing the equity from your home will make you owe more money.
- Longer repayment. Depending on the length or terms of your new loan, it may take significantly longer to pay off your mortgage.
- Difficulty getting approved. With more banks tightening their lending requirements, you may have a hard time getting approved for a new loan.
Make the Right Decision for You
Now that you know the pros and cons of are, the next step is to take some time to carefully consider the long-term cost of refinancing your loan. As you do this, there are a number of factors to keep in mind. Will you be charged an early payment fee on your existing mortgage? If so, how much will this cost? In some cases, you may be required to pay this fee upfront.
Will refinancing lower your monthly payments? By how much? This is an especially important consideration in cases where your interest rate is expected to increase. You will want to make sure that your new payment amount is worth taking on a higher interest rate. It may also be a good idea to check with local credit unions to see if they can offer a lower rate or better terms.
If you are refinancing to get a lower interest rate, how long before the money saved on interest payments will cover the cost of your refinance expenses?
Refinancing your home is a major decision that should not be taken lightly. Once you have considered all of the pros and cons of refinancing your home, you will be ready to make an informed decision.