Pros and Cons of Refinancing Your Home
7 Min Read | Published: October 3, 2024
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Explore the pros and cons of refinancing your home mortgage, including potential cost savings, risks, and considerations. See whether refinancing is right for you.
At-A-Glance
- The benefits of refinancing can vary, depending on the terms of the refinance and your financial situation.
- Depending on the type of refinance that you get, you may be able to lower your monthly payments, reduce interest costs, or tap into home equity.
- Refinancing a mortgage could be a smart financial move, but it may not be right for everyone.
If you have a mortgage, refinancing could be beneficial. Depending on the type of refinance that you get, you may be able to lower your monthly payments, reduce interest costs, or tap into home equity. Refinancing can be a good strategy, but it may also come with potential downsides that you should consider as well, and it may not be the right choice in every situation. Before you refinance your home, it’s a good idea to weigh the benefits and drawbacks to make sure it makes sense for you. In this article, we’ll examine the pros and cons of refinancing your home loan to help you make an informed decision.
Pros of Refinancing
Refinancing your mortgage could offer some distinct advantages. Depending on the type of refinance that you get, you may be able to benefit from one (or more) of the following:
- You May Be Able to Lower Your Interest Rate
In some cases, refinancing could allow you to secure a lower interest rate. A lower interest rate could potentially save you a significant amount of money over the life of your loan.1
- You Could Pay Off Your Loan Faster
You may be able to refinance your mortgage into a new loan with a shorter term. This strategy can allow you to repay your loan faster.2
- You Could Get Access to Cash That You Need
Through a cash-out refinance, you’ll be able to repay your original mortgage with a new, larger loan and cash out the difference.3 You can use the funds to renovate your home, pay for college, or something else.
- You May Be Able to Switch to a Fixed-Rate Mortgage
If you have an adjustable-rate mortgage (ARM), refinancing to a fixed interest rate loan will lead to predictable, monthly payments, which makes it easier to budget and plan. You won’t have to worry about a higher rate and larger payments.4
Cons of Refinancing
Here’s a look at the disadvantages of refinancing your home:
- You May Have Closing Costs
Unfortunately, refinancing is not free. Depending on the lender, you’ll likely have to pay closing costs that could be between 2% to 6% of your loan amount.5 You should do the math to make sure the benefits and potential savings of a refinance outweigh closing costs and other fees.
- May Result In an Extended Loan Term
If you lengthen your loan term or pursue a cash-out refinance, you’ll end up paying more in interest over the life of your loan. Note that this may be true even if your monthly payments are lower.6
- Monthly Payments May Increase
While a shorter repayment term can lead to significant interest savings, it may also increase your monthly payments. You should make sure you have the funds in your budget to cover them. It’s important to check your finances and make sure there’s room in your budget for this. If you end up defaulting on your home, the lender may be able to foreclose on your home.7
- May Reduce Equity In Your Home
If you opt for a cash-out refinance, you’ll borrow against your home’s equity and in turn, reduce it. For example, if you have $100,000 in equity but take $60,000 out in a cash-out refinance, you’ll only have $40,000 in equity left.8
- Qualification Requirements Will Need to Be Met
To qualify for a mortgage refinance, you’ll need to meet certain criteria. Most lenders require a credit score of at least 620, and in order to qualify for the lowest refinance rates, you may need to have an excellent credit score of at least 740. You may also need proof of stable employment, a minimum of 20% in home equity, and a home appraisal that shows that the property’s value is higher than the requested loan amount.9
Is Refinancing Right for You?
Whether you should refinance your home depends on your unique situation and the refinance terms that you get.
Here are a few scenarios where refinancing could make sense:10
- If You Can Secure a Lower Interest Rate
If you’re eligible for a lower interest rate, and the potential savings exceed the closing costs and other fees, refinancing could make sense.
- If You’d Like a Shorter Loan
If you’d like to shorten your loan term, and refinancing would allow you to do this, then it could be a good solution.
- If You’d Like to Switch to a Fixed-Rate Mortgage
It may also make sense if you hope to switch from an adjustable-rate mortgage to a fixed-rate mortgage with predictable payments.
- If You’d Like to Reduce Your Monthly Payments
On the other hand, if you’re struggling with your payments and want to lower them, refinancing could be a good solution.
Did you know?
It may be a good time to refinance when market interest rates are lower than the rate on your original mortgage.
Just make sure the terms of the refinance will allow you to achieve your goals and make sure that you can afford your new monthly payments. You may also want to consult with a mortgage professional or financial advisor to assess your refinancing options and see whether refinancing could be the right decision for you.
How to Get Equity Out of Your Home Without Refinancing
If you decide that refinancing isn’t the best move for you, these alternative strategies could help you to access your home’s equity to gain access to the cash that you need:
- Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of credit that allows you to tap into a portion of your home’s equity as needed. You then repay the amount that you’ve borrowed with interest.
- Home Equity Loan
A home equity loan works by allowing you to access a set amount of equity that you have in your home as a loan. You then repay the loan with interest.
Frequently Asked Questions
If the value of your home has increased, refinancing a conventional mortgage can help you get rid of PMI faster. Most lenders will allow you to cancel PMI when you’ve reached 20% equity.11
The right time to refinance will depend on your unique situation and refinance goals. It will also depend on market conditions, for example, you may want to time your refinance to take advantage of lower interest rates. The type of loan you have will determine how soon you can refinance. You may need to wait six to 24 months.12
Your closing costs as well as other factors will determine the amount you may save with a mortgage refinance. The savings won’t occur until you’ve reached the break-even point, which is when your savings exceed your closing costs. your closing costs divided by what you’ll save each month.13
The Takeaway
A mortgage refinance can offer a range of benefits, depending on the terms of the refinance. But it may also come with downsides as well. If you’re on the fence about refinancing, be sure to weigh up the pros and cons carefully to make sure a refinance will help you to come out ahead.
1,3,4,7,9,10 “Pros and Cons of Refinancing Your Mortgage,” Credible
2,8 “Pros And Cons Of Refinancing A Mortgage,” Rocket Mortgage
5 “Pros and Cons of Refinancing Your Home,” Experian
6 “Should You Refinance to a Shorter-Term Mortgage?,” Lending Tree
11 “How to Get Rid of Private Mortgage Insurance (PMI),” Bankrate
12 “How Soon Can I Refinance My House?,” Experian
13 “When should you refinance your mortgage?,” Bankrate
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Anna Baluch is a personal finance writer from Cleveland, OH. She enjoys helping people from all walks of life make smart financial decisions. Her work can be seen on Credit Karma, Forbes, LendingTree, Insurify, and many other publications. Connect with Anna on LinkedIn.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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