The Pros And Cons Of Refinancing Your Home Mortgage

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Refinancing is simply a way to replace your old mortgage with a new one. Since mortgage rates have remained fairly low in the past few years, it’s become a popular way for homeowners to reduce their interest rates and in some cases, take some cash out of their home equity. While finding a good deal on a mortgage refinance loan might offer you a good opportunity, there might also be some drawbacks that you should consider.

Benefits of Home Mortgage Refinancing

The main reasons that people get sold on refinancing is as a way to reduce their interest rate. If you are paying eight percent on your mortgage and could refinance at five percent, you could save lots of money over the course of a 15- or 30-year mortgage term. This might improve your financial situation because you will have more money to save for the future or to reduce other kinds of debt.

Some folks also decide to change the term of their mortgage when they refinance. For example, you might have taken out an original mortgage for 30 years. At this point in your life, you may decide you would rather pay your balance off in 15 years. Typically, interest rates on a 15-year note are cheaper than they are for a 30-year note, and you get to pay your loan off faster.

Alternatively, you may go the other way and decide to stretch your payments out for another 30 years in order to reduce monthly payments. If interest rates are considerably lower for a new mortgage than your old one, the actual payment might be the same or even lower. You will just have to make more payments. Most mortgage companies allow their customers to pay ahead, so you might still end up getting your loan paid off faster. You just have the option to stretch payments out.

Finally, people who have a decent amount of home equity may decide that they would benefit by cashing it out. Equity is defined as the difference between the amount of money that your house is valued at and the amount you still owe on your mortgage. Most lenders require their borrowers to keep about 20 percent equity in their homes, so this won’t work for everybody. Still, it can be a good solution for people who have lived in their houses long enough to build up a good amount of equity and can use the cash to benefit them in some way.

When is Mortgage Refinancing a Bad Idea?

First, you should know that refinancing usually isn’t free. You may have to pay some fees, closing costs, and other expenses to qualify for your new loan. For example, you might have to pay to get your house appraised. It is possible to roll some of these costs into your new loan, but you may end up with a larger loan balance than you started with. It’s always a good idea to shop around to find a broker or lender who will find you the best deal.

Should You Refinance Your House?

It’s important to weigh the costs and benefits of replacing your old loan. If you can save money with lower interest rates or use the money from your home equity to improve your financial situation, it could be a good idea. You might begin by speaking with a mortgage broker to see how refinancing would work for you.