5 Critical Home Refinancing Pros and Cons

If you have a mortgage on your house, then presumably that is one of the most significant bills you pay each month. It’s like paying rent when you live in an apartment, but with one vital difference. The difference is that you’re gradually building equity, with the idea being that someday, you will own your home outright.

However, some people find the amount they pay each month onerous, and they decide they want to refinance. Refinancing your mortgage can pay off in your favor, but there are some potential drawbacks to doing it as well. Let’s look at both pros and cons, so you can better decide whether this is something that makes sense for you.

You Can Get a Big Chunk of Money at One Time

Before we start talking about home financing pros and cons, you should know about refinancing calculators. A refinancing calculator lets you look at:

  • The original loan amount
  • The original mortgage rate
  • The loan date
  • The current interest rate

You compare these to the new loan, looking at various factors, such as points, fees, and closing costs. You’re trying to figure out whether what you save in interest justifies paying all of those. If it does, you should refinance, but if it doesn’t, you shouldn’t move forward.

Now, on to the pros and cons. You can refinance and cash out a home equity chunk if you want. When you do that, you’ll have a large amount of money on your hands. You can use it if you’re going to do something like pay for a child’s college education or start a business.

However, the money you take out will cost you more in interest over your new loan’s life. In other words, you’ll have the cash you need for some particular endeavor, but you’ll reduce your home’s equity. Because you reset your loan term, you will also pay more in interest.

You Can Reduce Your Loan Term

Reducing your loan term is another potential reason you may want to refinance. Let’s say you can easily afford to pay your monthly payments right now. This might be the case if:

You could shorten your loan term and pay more per month over a shorter period. You could own your home sooner, and you could save tens of thousands of interest dollars.

You Can Switch to a Fixed Rate

Maybe your original mortgage is an ARM, or an adjustable-rate mortgage. Your first fixed term may be about to expire. If so, now just might be the time to refinance.

If you do, you can lock in a fixed-rate mortgage this time. This keeps rising interest rates from hurting you in the future. You can also budget easier because you’ll have the same interest payment and principal each month.

The real pro here is that you get potential cost savings and stability. The con is that you really can’t take advantage if interest rates drop in the future unless you refinance again.

You Can Get a Lower Interest Rate

Maybe interest rates drop after you set up your initial loan. If you refinance, you can certainly take advantage of that lower rate. Depending on how long you have had your loan, you might save a ton of money.

You can reduce your overall interest payments. However, whether this matters depends on how long you have had your loan. If you’ve had it for more than a few years, you may not save in the long run.

You Can Get Lower Monthly Payments

Lower monthly payments are perhaps the reason why more individuals and families refinance than any other. If you have made payments for several years, and you refinance for another 30-year term, you can pay much lower monthly payments from that point forward.

The drawback is that you’ve pushed back the time till you can own your home outright. If that doesn’t matter so much to you, and you just want to pay less each month, this might be the right move. Still, you should remember that you’ll pay more in total interest.

You will need to carefully consider your situation before you decide whether refinancing will work for you. Think about your short and long-term financial goals.

If you’re having trouble, reach out to a financial planner. They can help you look at the numbers and determine whether refinancing makes sound economic sense for you and your family.