What Are the Pros and Cons of Refinancing a Mortgage?

Choosing to refinance your mortgage is an often overwhelming decision. Examining the pros and cons can help you determine the ideal option for you and your family.

Positive Aspects (Pros)

  • Lower interest rate: This could be beneficial if interest rates are lower now than when you bought your home. A general rule of thumb advises that you should be saving 1 percent or more on your interest rate to make a refinance worthwhile.
  • Lower monthly payment: Lower interest rates often mean lower monthly payments, which can save you money that’s needed elsewhere in your budget.
  • Cash in hand: Borrow against the equity you’ve accrued in your home and get cash for other concerns such as paying off bills and high-interest debt.
  • Improved loan term: A shorter-term loan with lower interest rate means you’ll pay less interest over the life of the loan without increasing your monthly payment. Big plus: Your mortgage will be paid off sooner.
  • Convert adjustable-rate mortgage to fixed-rate: A fixed-rate loan offers security. Your monthly payment remains constant despite interest rate hikes. Your rate may be higher rate than a variable rate mortgage, but you won’t wind up with a whopping monthly payment if the prime rate increases.
  • Convert to a conventional loan: Once you’ve reached 20% equity in your home financed with a VA or FHA mortgage, you can unload high mortgage insurance premiums by converting to a conventional loan.

Negative Impacts (Cons)

  • Image via Flickr by CreditDebitPro

    Refinancing costs: Closing costs add up to big bucks. They’re many and varied, such as application fee, title search, home appraisal, attorney fees, and credit report fees.

  • Early payoff penalties: Your current mortgage came with a Truth-in-Lending statement. Check the details to make sure any prepayment penalty the lender charges gets figured into refinancing costs.
  • “No-cost” is costly: Be aware that a “no-cost” lender generally blends the up-front costs into a higher interest rate loan.
  • Relocation: Consider the length of time you plan to stay in the house. Weigh interest saved during that time frame against initial closing costs to make sure the refinance is economical.
  • Extended loan term: If you’ve paid several years into your current mortgage, be wary of refinancing to a longer loan period. It’ll take longer to own your home free and clear and could increase the total amount of interest paid over the life of the loan.
  • Too much, too soon: Shorter-term loans offer inviting low interest rates. You may be drawn in by the appeal of owning your home outright in 15 years only to find that the larger monthly payment is too much to handle.
  • Lucrative ResultsWithout a doubt, there’s much to take into account when you’re thinking about refinancing your mortgage. As financial transactions go, it can be complex. Careful forethought and deliberate action will help you stay the course to the best outcome.

    Every situation is unique, but the good news is there are cost-effective options that are just right for you and your family. And surely, every happy homeowner can get a rise out of the dough they’ve saved on mortgage payments.