The Pros and Cons of Refinancing

Closing costs are those costs associated with the purchase of a home that go beyond what you are providing as a down payment.

Refinancing your mortgage can be a great way to lower either your interest rate or payment or to use the equity in your home to fund other things, such as home projects or education. (Equity is the difference between what your home is worth and what you currently owe on it.)

If you’re interested in refinancing, there are two types of refinancing options available to you. The first is called a rate-and-term refinance. This is where you take no cash out of the transaction. The other type is called a cash-out refinance, and it allows you to take money out.

On the pro side, mortgage interest rates are still at relatively historic lows. With home prices increasing in many parts of the country, this means equity has grown over the last few years for many homeowners, making it easier for them to refinance their homes than it has been for some time.

On the con side, there are things you need to think through before you start the process of refinancing your home. The first is whether it’s the best option you have available at this time.

For example, if it costs you $1,500 to refinance your mortgage and lower your payment by just $40 per month, consider your payback period (how long you’ll be enjoying the payback of this lower payment). If you are planning to move in a few short years, you may want to consider other options.

Also, with increased equity in your home, you’ll have access to more funds than you might have otherwise. Tapping into this money could mean a higher mortgage payment (sometimes significantly higher than what you have now), and it will be higher for as long as you have this mortgage.

Lastly, cash-out refinances carry a higher interest rate than rate-and-term refinances.

If you have any questions about how this process works, I’d love to answer them. Just give me a call.