Pros and Cons to Refinancing Your Mortgage

Refinancing a mortgage is something many homeowners consider, especially when overall interest rates are low. The refinance process basically amounts to taking out a new mortgage that pays off the old one, but with more favorable terms — like a lower interest rate or a variable-rate structure.

The opportunity for cost-savings can be hard to pass up, and while there are certainly benefits to refinancing, there are also drawbacks. After educating themselves on what refinancing is, homeowners should consider their own personal finances and life plans to determine if refinancing is actually worth it.

Here are some pros and cons to refinancing your mortgage to consider.

Pros

1. Reduced interest rate 

Decreasing your interest rate by even half of a percent can have a huge impact. According to the Consumer Finance Protection Bureau, the difference between a 3.5% rate and 4% on a $400,000 30-year mortgage is $114 per year in interest payments. Refinancing is particularly advantageous if prevailing rates have decreased in the time since a homeowner first took out their mortgage. Taking out a new mortgage at a lower rate can save thousands over the lifetime of a loan.

2. Cash-out potential

Refinancing can help a homeowner cash in on the equity they've built up in their property. A cash-out refinance provides the borrower with proceeds to potentially pay off personal debts or make home improvements. A homeowner looking to stay long term can upgrade the livability of their home, while a homeowner who refinances to a shorter term can invest in renovations that add to resale value.

3. Change your loan type

If your life plans change, so too can your mortgage. Converting to an adjustable-rate mortgage from a fixed-rate loan, or vice versa, through refinancing is flexibility homeowners can take advantage of.

Cons

1. Term length resets

While refinancing has benefits, homeowners shouldn't make a habit of it. Each time you refinance, you lock into a new loan. Essentially, that restarts the term length each time you refinance; so while you may have a lower rate, you could end up paying more in interest because of the extended loan lifetime. You'll have to consider where you are in your mortgage repayment. For instance, a homeowner with five years left on a 30-year loan might not benefit as much as one who's only five years into a 30-year mortgage.

2. Overall greater costs

Refinancing may net you a lower monthly premium, but the overall costs of borrowing could increase, which not everyone thinks about. There's not only the interest rate factor, but the reintroduction of closing costs and other associated fees for things like a home appraisal or insurance. Not accounting for these cost variables can take some of the benefit out of refinancing.

3. Bad timing

It's crucial to research the current rate environment and look at some general predictions. This can help prevent refinancing at the wrong time. Macroeconomic factors are out of your control, but being knowledgeable on the overall trends can protect you against refinancing into a variable-rate loan as interest rates tick up across the country.

Interested in more about refinancing? Contact your local Vectra Bank rep today.