As a homeowner, you constantly look for ways to save money and stay financially afloat. One way you can do that is by refinancing your mortgage. Refinancing is the process of replacing an existing mortgage with a new one with different terms and rates.
The question is, do you really need to refinance your mortgage? Well, it turns out that the answer lies in your needs and financial goals.
In this article, we will go over the pros and cons of refinancing so you can make an informed decision.
Benefits of Refinancing
Lower Interest Rates
A lower interest rate can drop your monthly mortgage payments and save you thousands of dollars in interest in the long run.
For instance, if you purchased your home in 2019 and got a 30-year fixed-rate mortgage at 4.2% and refinanced it for 3.0% in 2021, you could save $92,000 over the life of the loan. You can do the math accordingly.
Reduce Monthly Payments
If you extend the term of your mortgage, you could lower your monthly mortgage payments. Something can be a big benefit if you are struggling to make ends meet.
For example, if you refinance for another 30-year mortgage from a 15-year fixed-rate mortgage, your monthly payment will go down.
Access Home Equity
Refinancing your mortgage also gives you the opportunity to tap into your home equity and get cash out. This money can be used for a variety of reasons, such as home renovations or debt consolidation.
So, keep in mind that cash-out refinancing comes with higher closing costs and interest rates.
Cons of Refinancing
Here are the drawbacks that come with refinancing:
High Closing Costs
One of the biggest barriers to refinancing is the high closing costs. Closing costs are fees charged by lenders, and they can range from 2% to 6% of the loan amount.
Be sure to evaluate whether the savings you would get each month from refinancing would offset these costs.
Reset the Clock
Refinancing your mortgage often means starting the clock all over again with a new loan term.
For example, if you refinanced your 20-year mortgage with another 20-year mortgage, you would then have 20 more years of monthly payments, which can be costly in the long run.
Credit Score Impact
Refinancing can impact your credit score. When you apply for a new mortgage, your credit score will be evaluated by lenders.
Thus, multiple credit checks can bring down your credit score.
When Does Refinancing Make Sense?
Refinancing can make financial sense in a number of scenarios. Some of the most common include:
- You want to lower the monthly payment.
- Interest rates have gone down.
- You want to remove mortgage insurance.
- When you want to tap into your home equity.
Summing Up
Refinancing your mortgage can be a big decision, and there are plenty of factors to consider. Ultimately, whether or not you should refinance depends on your financial situation.
If you are looking to save money on your monthly mortgage payments or take advantage of a lower interest rate, refinancing can make a lot of sense. However, you should weigh the pros and cons carefully before you start the process. Be sure to talk to a reliable mortgage professional so you can make the right decision for your situation.