In times of economic uncertainty, many people find that refinancing their mortgage gives them some financial breathing room by lowering their monthly payments or allowing them to save money in the long run. However, refinancing can be complicated, so it is important to ensure that you know the pros and cons of refinancing mortgage so you will end up in a better position before embarking on this process.
What Is Refinancing Your Mortgage?
Refinancing a mortgage essentially means you are taking out a new loan on your property that often amounts to the remainder of what you owe on it. The new loan will ideally carry better terms than the previous one. The new terms will depend on factors such as how much equity has been built in the home and your credit score at the time of applying.
Pros Of Refinancing Your Mortgage
There are a lot of advantages of refinancing your mortgage, including the possibility of getting a lower interest rate or monthly payment, reducing your payoff term and the ability to cash out equity for other uses.
Lock In Lower Interest Rate
One of the biggest pros of refinancing a mortgage is the ability to lock in a lower interest rate. Your financial situation as well as the state of the market and the value of your home may have changed dramatically since you first bought it, and a refinance can help you benefit from a more favorable interest rate. This, in turn, can lead to smaller monthly payments and more of your payment being put toward paying off your principal.
If you expect your cost of living to increase, perhaps because your family is expanding or your income has dropped, a refinance can be a good way to make more room in your monthly budget. In some cases, you may be able to switch from an adjustable-rate to a fixed-rate mortgage if your initial fixed term is about to expire. This can protect you from rises in interest rates in the future. In addition, having the same principal and interest payments each month makes planning and budgeting easier.
Might Be Able To Cash Out
There is a good chance that you have built some equity into your home if you have owned it for many years, particularly if you have been making improvements and making all of your mortgage payments on time. Refinancing can serve as a way to gain access to some of this equity. Many borrowers who refinance use it as an opportunity to take some of the cash from the value of their home and use it for other costs, whether it is sending their children to college or reinvesting in other properties. In addition, if you find that you can afford to pay higher monthly payments, you may be able to shorten your loan term through a refinance, which could lead to significant savings in interest throughout the life of the loan and allow you to fully own your home sooner.
Cons To Refinancing Your Mortgage
Although refinancing makes sense in many cases, there are a few factors to keep in mind when determining whether it is the right move for you.
Savings Could Be Minimal
Although the possibility of locking in a lower interest rate through a refinance is a very attractive one, it is important to keep in mind that the benefits may not be as great if your financial situation or the value of your home have not changed significantly since you first took out the mortgage. You will also need to weigh your savings against the fees that are associated with refinancing to ensure that it is worth proceeding.
Refinancing Takes Time
Some people are drawn to the idea of moving from a 30-year loan to a 15-year term as they can save significant money on interest. In addition, paying off a loan quicker means getting rid of the debt much sooner.
However, it is important to keep in mind that refinancing your home takes a lot of time, resources and money. While it is still a good idea for many people, if you are not going to see a big change in your payments or interest, it may not be worth the effort.
Fees Associated With Refinancing
Refinancing may put you in a better position financially, but you must factor in the costs that are associated with refinancing and evaluate your budget to see exactly how much money you would save before making a decision. A refinance, like the original mortgage, will have closing costs that include appraisal fees, title services, lender origination and administration fees, underwriting fees and credit report fees. These fees may be wrapped up in the amount of your loan, but you will still end up paying them.
Take With Us About Pros And Cons Of Refinancing Mortgage
If you would like some expert guidance on whether refinancing is the right move for you, reach out to My Lending Pal to discuss the pros and cons of refinancing your mortgage.
