A home mortgage is sometimes called “good debt” because, unlike credit cards, personal loans, and auto loans, a mortgage helps you buy and own an asset that can become more valuable over time.
There’s even a smart way to turn your “good” mortgage debt into “even better” mortgage debt: refinance.
The truth about refinancing your mortgage
There are several key factors to consider when deciding whether or not to refinance your mortgage. You’ll want to carefully examine each one as it relates to your specific situation to figure out if refinancing is the right move for you.
Pros and cons of refinancing your mortgage
Here is a list of the benefits and the drawbacks to consider.
- If you refinance with a lower rate, you could pay less interest every month and over the lifetime of your loan.
- If you have mortgage insurance and you refinance into a loan that doesn’t have it, you could save money every month and over the lifetime of your loan.
- Shortening your loan’s term might save money by paying off your loan sooner.
- If you lengthen your loan’s term, your monthly payment might be lower and more affordable for you.
- In cases where you refinance from an adjustable or hybrid rate into a fixed rate, you won’t have to worry about having a higher rate or payment in the future.
- If you have enough equity in your home, you might be able to get cash back when you refinance. You can use the cash to pay down other debt, make repairs or improvements to your home, or for other needs or wants.
- You might be able to refinance with no out-of-pocket costs by adding your costs to your loan amount or letting your lender pay your costs and give you a slightly higher rate.
- If you refinance with a higher rate, you might pay more interest every month and over the lifetime of your loan.
- If you refinance to a shorter term, your rate might be lower, but your payment could be higher.
- Refinancing to a longer term may lower your payment, but you might pay more interest over the lifetime of your loan.
- You’ll have to pay closing costs, which could be thousands of dollars out of pocket.
- If you plan to sell your home within the next few years, you might not recover your closing costs.
- You’ll have to spend time researching lenders, choosing a loan, gathering your financials, and signing your closing documents.
What are the benefits of refinancing a home?
Refinancing offers a variety of potential benefits. You could save money by getting a lower rate, lowering your payment, getting rid of your mortgage insurance, or reducing your total interest expense over the lifetime of your loan. This can create an opportunity to pay off your loan sooner.
You might enjoy more peace of mind and less stress with a fixed rate instead of an adjustable or hybrid rate. Refinancing is also a good option if you need to remove a borrower, such as a former spouse after a divorce.
What about refinancing with a higher rate?
Refinancing with a higher rate than you currently have might seem like a nonstarter, but there are situations when it can make sense.
You might want to consolidate other debt into your mortgage by taking out cash and using it to pay off credit cards or other loans. It’s also possible to take out cash to make necessary repairs to your home or to add a bedroom, bathroom, swimming pool, or other improvements.
You might want to lock in a fixed rate even if it’s a bit higher than your current adjustable one. You could save money by refinancing at a higher rate and removing mortgage insurance from your loan.
How much does it cost to refinance a home?
Refinancing isn’t free. It can cost about 2-3% of your loan amount, says Adham Sbeih, CEO of Socotra Capital, a real estate lending and investment firm in Sacramento.
Always ask a lender for a detailed explanation of all fees. Also, ask if the new loan will increase your loan balance or if you could get a lower rate if you paid the fees out of pocket,”
You’ll usually have to pay for an appraisal of your home’s value, plus loan origination and processing fees, attorney, settlement or escrow fees, credit reporting fees, and title search and title insurance costs. You might also have to prepay your next property tax installment and homeowner’s insurance premium.
Keep in mind that mortgage refinancing costs vary widely from lender to lender, and refinancing is more expensive in some states than it is in others. You should shop around and talk to a few lenders before you choose one for your mortgage refinance.
“Always ask a lender for a detailed explanation of all fees. Also, ask if the new loan will increase your loan balance or if you could get a lower rate if you paid the fees out of pocket,” says Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate in Santa Rosa, Calif.
Are there any other factors I should consider?
In addition to the pros and cons above, there are other equally important factors to consider before choosing to refinance your mortgage, such as:
- The type of mortgage you have
- How long you’ve had your mortgage
- How long you plan to keep your home
- Whether you’ve improved your credit
- The goals you hope to achieve by refinancing
- How much it will cost you to refinance
Is refinancing your mortgage worth it?
So, what’s the bottom line? What are the pros and cons of refinancing your mortgage? Should you or should you not refinance your mortgage?
That’s the question of the hour and, the truth is, the answer depends on the person who’s asking. But now that you know the pros and cons of refinancing, you probably have a good idea whether or not it’s the right move for you.
Regardless of which direction you’re leaning in, though, it’s always a good idea to do more research and talk to various lenders. You may learn that you’re actually leaning in the wrong direction. Or, you might get confirmation that you’re making the right decision.
To find out for sure, start by comparing mortgage refinance lenders side-by-side and narrow down your top three options. Then, get in touch with those lenders to discover how much money, if any, you could save by refinancing your mortgage with them.
The more you know, the closer you’ll be to making the right decision.