Looking to save on your bills? Some homeowners are opting to refinance their mortgages to secure better interest rates and smaller monthly mortgage payments. There are numerous reasons to refinance your mortgage. You can even tap into your existing equity to achieve your financial goals.
However, refinancing is a major decision. Here are the pros and cons of refinancing your home.
What Does It Mean to Refinance Your House?
When you refinance your home, you’re replacing your original mortgage with a new one. The goal in doing this, of course, is to secure a new mortgage with lower interest rates or a shorter loan term — or both.
With better loan terms, you can expect a lower monthly bill, which can create some breathing room in the family budget. Alternatively, refinancing can shorten your existing loan, ensuring that you pay off your loan more quickly.
While this can save you money over the long term, keep in mind that you will still need to pay closing costs to complete the process.
Should I Refinance My House?
Refinancing your home may sound like a convenient option, but it’s not one that you should take lightly. It’s important to weigh the pros and cons of refinancing your mortgage so that you can make the best decision for you and your family.
Pros of Refinancing Your Home
Most of the pros of refinancing your home relate to the associated costs. If your financial situation has changed since you originally purchased your home, then now may be a good time to refinance. The benefits of refinancing your mortgage can include the following.
Lower Interest Rate and Monthly Payment
One of the major reasons homeowners choose to refinance is to secure a better interest rate. A lower interest rate can save you thousands of dollars over the life of your loan, as well as reduce your monthly mortgage payments.
This is especially beneficial if your credit score has increased since you first applied for a mortgage. With a higher credit score, you’ll qualify for the best rates and terms and save money on your loan.
In addition, refinancing can provide the means to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Doing so will ensure that your monthly payments remain the same throughout your loan term, which can make it easier to plan your budget.
Reduced Loan Term
Mortgages typically come in 15-year and 30-year terms, with most buyers opting for 30 years to spread out the cost and reduce their monthly payments. Refinancing your home can reduce your loan term.
For example, you might consider refinancing your 30-year loan with a 15-year loan. Alternatively, you might secure a new mortgage with no prepayment penalty, allowing you to make extra payments and pay off your mortgage as quickly as possible.
Why would shortening your loan term be an advantage? For one thing, you’d get out of debt much sooner. Once your mortgage is paid off, you’ll have a lower debt-to-income ratio, which can help you qualify for future loans for cars or even retirement and investment properties.
Also, by paying off your loan sooner, you’ll save thousands of dollars that you’d otherwise pay in interest.
No Private Mortgage Insurance
When you bought your home, did you have enough to make the traditional 20% down payment? If not, then you’ve been strapped with private mortgage insurance (PMI).
The average PMI payment ranges between 0.5% to 2% of the original loan amount. Lenders typically roll these fees into your regular monthly payments, so it’s possible you’ve even forgotten about these fees.
When you refinance, your new loan will calculate the equity in your home based on its current value. If you have 20% equity, refinancing will allow you to eliminate PMI fees, shaving some money off your monthly payments — in addition to any savings you might secure with a lower interest rate.
Cash-Out Refinance
Do you need extra cash? A cash-out refinance allows you to tap into your home’s equity to get it. With this refinancing strategy, you’ll take out a loan that’s larger than you need for the home itself. The additional money can then be paid to you in cash.
The advantage is that there are no restrictions on how you use the loan. You can pay off credit card debt, student loans, fund your children’s education, or even make home improvements that increase your home’s value.
Just be sure that your new loan also offers a lower interest rate. Otherwise, the cash you receive will be offset by the money you pay in interest over the life of your new loan. And this refinancing option only works for homeowners who have some existing equity in their homes, with most lenders looking for at least 20%.
How Does A Cash-Out Refinance Work?
Cash-out refinancing allows you to access the equity in your home and turn it into cash. Even if you haven’t fully paid your mortgage, you can still tap into your existing equity and refinance your home.
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Cons of Refinancing Your Home
Despite the advantages, refinancing your home isn’t always the right option. As you consider the pros and cons of refinancing your mortgage, you’ll need to keep a few things in mind.
Closing Costs
Remember the closing costs you paid when you first purchased your home? When you refinance your mortgage, you’ll have to pay closing costs all over again. These can include appraisal fees, attorney fees, filing fees, and all the other expenses that go into buying a property.
Closing cost don’t have to be a barrier to refinancing, but it’s important to run the numbers and ensure that the benefits of refinancing outweigh the cost of going through the process. For instance, if refinancing your home will only save you a small amount, it may not be financially worth it.
Potentially Higher Payment with a Shorter Term
A shorter loan term is a great idea for getting out of debt. But the shorter your loan term, the higher your monthly payments.
Before you refinance your home, be sure that your finances are stable enough that you can afford to make larger mortgage payments each month. Leave yourself some breathing room for emergencies and unforeseen expenses as well, or you could find yourself missing payments and paying penalties.
Credit Score Changes
While evaluating your eligibility for refinancing, a lender will perform a hard credit inquiry to view your credit history. These inquiries can reduce your credit score, at least on a short-term basis.
These sorts of dips in your credit score are marginal and will quickly improve once you make timely payments on your new loan. But a drop in your score might jeopardize your eligibility if you’re also applying for other financing products in the same general period.
CrossCountry Mortgage Refinance Options
As you can see, the pros and cons of refinancing your home aren’t always the same for everyone. But some of the drawbacks of refinancing are easy to navigate if you have the right guide.
CrossCountry Mortgage is here for you as you make these decisions. Our goal is to listen to your needs and find a refinancing solution that fits your financial goals and your budget.
When you’re ready, you can apply online to get the process started, and our experienced team will evaluate your financial history and help you explore your refinancing options.
To learn more, speak with one of our representatives or start your application today.
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