Should You Refinance Your Mortgage?
Refinancing can save you money and let you cash out some of your equity. But it’s not always worth it. If you have strong credit and your savings will easily offset the upfront costs, refinancing is a solid choice. Otherwise, you might want to pump the brakes.
If your credit score has improved since your first mortgage or lenders are offering much lower rates due to market conditions, refinancing could mean big savings—especially if your also shorten your repayment timeline. But if your repayment term is longer or the loan is larger, you could end up paying more over time and going further into debt.
Pros
LOWER INTEREST RATE
One of the most common reasons for refinancing is to get a lower interest rate, which, combined with a shorter repayment term, would result in major savings.
LOWER PAYMENTS
You could also opt to have lower monthly payments by choosing a longer repayment term, although your overall savings would be reduced or eliminated.
ELIMINATE PMI
If you put down less than 20% when you bought your house, you’re probably paying PMI—which can add hundreds to your monthly payment. But if you’ve paid down your loan balance or your value’s gone up, you may now have the equity you need to eliminate that expense.
CHANGE RATE TYPE
When refinancing, you could switch from an adjustable rate to a fixed rate. If rates are low today but expected to go up in the future, this is a very attractive option.
REMOVE (OR ADD) COBORROWER
If your current mortgage includes a cosigner or coborrower, such as a former spouse, your new loan could remove that person. Conversely, if you’d like to add a coborrower, perhaps a new spouse with a strong credit score and good income who can help you qualify for the best rates and terms, you can add them to the new loan.
GET CASH
A cash-out refinance lets you take out a new (bigger) loan, then take out in cash the difference between what you owed on the old loan and the amount of the new loan. This money could work for you if you use it to pay off credit card debt, fund a college education or make certain home improvements. Note: A cash-out refinance is only a good idea when you get a lower interest rate than you started with.
Cons
CLOSING COSTS
Refinancing comes with closing costs of 2%-6% of the new loan amount. This includes various fees, some of which you might be able to negotiate.
HIGHER DEBT RATIO
If you take out a larger loan as part of a cash-out refinance, your debt-to-income ratio will rise, making it harder to afford your monthly payment.
LONG-TERM EXPENSE
Due to interest costs, refinancing may end up costing you more over the life of your loan, even if your payments are smaller.
