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11 Different Pros and Cons of Refinancing Mortgage

There are a lot of reasons to refinance a mortgage. If your mortgage is still young, refinancing saves money with a better interest rate. In some cases though, refinancing might not be recommended. Whether you should or should not refinance a mortgage all depends on your current financial circumstances. This may be your best option, or there could be other preferable alternatives.

To help you learn more about this method, here are the pros and cons of refinancing a mortgage:

Pro – Interest Rate Reduction

Your mortgage is young. You have a higher interest rate than you’d prefer. It’s a great time to refinance mortgage. Even a reduction of two percent can prove significant.

If you have a $250,000 mortgage at six percent in interest, reduce it to four percent and save $300/month. Increase monthly spending and free up some additional cash. You should contact your mortgage lender to explore different options and figure out which tier is the most profitable.

Pro – A Fixed Mortgage with Low Interest

Among the pros and cons of refinancing a mortgage, one of the benefits is that you can negotiate a fixed mortgage. This means you get to keep the interest rate you have until the end of your term. Refinancing from a variable rate mortgage to a fixed interest rate means you keep your current agreement.

For homeowners who never wanted to be on a variable rate mortgage, here’s an opportunity to make the move to a more stable mortgage plan.

Con – New Loan, You’re Sent Back to Square One

When you pay a mortgage, you start by paying the interest first. Refinance and this restarts the clock. If you’re already at the point where you’re paying down the principal, refinancing’s only going to set you back. You’ll be paying interest all over again.

It’s the equivalent of borrowing your own money from the bank and paying the bank interest to provide it to you.

Pro – Apply For a New Mortgage

This can work as a con as well. Refinancing is essentially applying for a new mortgage. If your current mortgage was agreed on when your credit was worse and you didn’t have as much money to contribute, there can be benefits to this renegotiation process.

With that said, expect your credit report and financial information to be heavily scrutinized. If your credit score has gone down or you’ve recently lost your job, we don’t recommend considering a refinancing.

Pro – Tap Into Your Equity

All the time you’ve been paying into your mortgage, that’s equity for you to tap into at some point. You don’t have to wait until you sell or in retirement.

Consider a cash-out refinance. You borrow against your equity and refinance for more than what your home’s current principal balance. This is extra money you can use to pay down debt, renovate, start a business, or contribute to tuition.

Con – Additional Fees

You’re refinancing a mortgage and with that comes new fees. Think closing costs, loan fees, processing fees, and appraisal fees. Consider the numbers. Is it worth it to pay all that to just refinance – for some, it is. For others, it won’t be.

Pro – Extend the Term, Lower Your Monthly Payment

It’s not a perfect strategy but if you need a little more help in your budget, a mortgage with an extended term will reduce what you pay monthly. It will also, however, increase the interest required to be paid in the long-term.

This is a short-term strategy that can backfire if one’s calculation are off and can result in you paying way, way more in additional interest.

Pro – Consolidate Other Debt

If you have high-interest debts to your name, refinancing a mortgage might be a way to take care of it. A car loan, a line of credit, credit card bills, etc. If you’re losing money covering payments on these because the interest rates are too high, refinancing could be an option.

Alternatively, a lender may be able to suggest other means or ways of borrowing to clear away high-interest loans. Regardless, refinancing doesn’t have to be taken off the table as a consolidation strategy.

Con – You Will Pay More If You Sell Soon

If you aren’t planning on staying put, don’t refinance. Consider your break-even point. That is when all these costs to refinance balance out with your new interest rate and monthly payments. It could take years to get there.

If you intend on selling or moving in the next 1-2 years, refinancing is only going to cost you money. Any sort of significant financial benefits will be outweighed by the costs of the action.

Pro – You Have Money to Conduct Renovations

Although some would consider it a weak reason to refinance, when you tap into your equity through refinancing it gives you money to conduct major repairs on the property, complete renovations, expand the size of the dwelling, or do similar projects.

If you believe you can contribute more value to the property and make it more enjoyable for you to live in, you may deem it worth it to refinance.

Con – You May Pay a Penalty

Refinancing a mortgage can involve breaking a mortgage agreement. If you break your mortgage before the term is over, a lender may charge you a prepayment penalty.

Fixed mortgages have a penalty that’s the greater of either three months’ interest or the interest rate differential payment. For variable rate mortgages, it’s a simple penalty of three months’ interest.

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