Mortgage Refinancing: Learn About Its Pros and Cons to Determine If It’s For You


If you’re like many people who purchased your house using a loan, you might still be paying for your mortgage. With the lower interest rates being offered for the past few years, you may want to consider refinancing. Refinancing refers to the paying of your existing mortgage through another loan. Since this is a new loan, it has new terms that you may benefit from. It has its pros and cons, which you must take into consideration before deciding to apply for refinancing.

Refinancing Pros

1. Lower Interest Rate

The interest rates of mortgages are lower compared to the rates several years back. If you’ve purchased your house during those period when rates are soaring high, you may benefit from the lower rates offered by lenders today. Through this, your monthly payment will go down, so you’ll have extra cash to add on your budget or savings.

2. Several Options Available

There are more lenders offering housing and refinancing loans today. This is an advantage since you’ll have more options to choose from. They are competing for clients so you are more likely to get a great deal if you shop around.

3. Payment Period Can Be Adjusted

You can make the payment period longer or shorter, depending on your preference. While the monthly payment will be lower if you pay for an extended period, the interest accumulates, so you would still be paying more in the long run. If you decide to make the payment period shorter, you may be paying a higher monthly fee. However, since your interest is lower, you may still be able to afford it. What’s good about this is that you’ll be debt free earlier and the total amount that you pay would still be lower, considering the low interest you pay within a shorter period.

4. Convert to Fix Rate

Most mortgages have adjustable interest rate. They usually start with a low interest that may go up, depending on the current rate. If it goes down, then you’ll benefit from it. However, if it goes up, then that would make your monthly payment go up too.

By refinancing, you can convert your interest rate to a fix one. If you locked your interest at this time when rates are low, you don’t have to worry about anything, even if it starts increasing again. You’ll have the same interest rate until your mortgage is fully paid. This will also help you handle your finances better, since you’ll know specifically how much you would pay each month.

5. Get Cash

Equity is the difference between the amount you owe to the mortgage and your home’s value. When you get refinancing, you may cash out your home’s equity in case you need money for emergency situation. While you can use this money for any other reasons, it’s not recommended that you do unless it’s badly needed. This is because you have to start building your equity again. If you decide to sell your house, you may not get much money if you withdrew the said amount.

Refinancing Cons

1. Various Fees

You need to pay various fees if you apply for refinancing. If you are thinking about selling your home or moving in the near future, the amount that you’ll pay for the process may be more than what you’ll save from the low interest rate. Some of these fees include the application fee that costs between $75 and $300, which you need to pay even if refinancing is denied. Other expenses are appraisal fee ($300 t0 $700), homeowner’s insurance ($300 to $1,000), inspection fee ($175 to $350) and more.

2. Not Everyone is Eligible

There are certain requirements that you should meet to be considered for refinancing. Some of these requirements include timely payment of loans, meeting specific income, a certain percentage of equity, etc. The requirements vary from one lender to another so make sure to understand them before sending an application.

3. Penalties for Early Payment of First Loan

There are also lenders that penalize those that pay their mortgage in full, earlier than the agreed period. This is because they would not be able to earn from the interest that you should still be paying. Make sure that you include this when calculating for the expenses that you may incur when having your home refinanced.

4. Preparation of Needed Papers

Refinancing Documents

Lots of paperwork must also be done. This may be time consuming and tiring. Some of the documents that you may need are income tax return, proof of savings and checking account, statements for your investments and loans, and pay stubs.

Weigh the pros and cons of refinancing before making your decision. Make sure that the benefits outweigh the drawbacks so you could win in the process.

Photo Attribution:

Featured and 1st image by phasinphoto /

2nd image by luigi diamanti /