Thinking about refinancing? When you refinance your home, you get a new loan and use the proceeds to pay off the balance of your existing loan.
Some of the reasons to consider refinancing are:
- You can take advantage of lower interest rates, if rates have dropped since your original loan.
- You can move from an adjustable-rate mortgage to a fixed rate mortgage.
- You can take advantage of the equity built up in your home by borrowing additional amounts when refinancing.
Here are some potential pros to refinancing your mortgage:
- You can reduce your interest rate and lower monthly payments.
- You may be able to either shorten or lengthen your repayment timeline.
- You can take cash out, which can then be used to spend, invest or pay other debts.
- You’ll have the ability to move from an adjustable to a fixed-rate mortgage.
- You might reduce or stop private mortgage insurance (PMI) if your home has increased in value.
- In some cases, you may be able to pay your home off more quickly than you would have under your original mortgage.
Here are some potential cons to refinancing your mortgage:
- Refinancing costs. Paying points, fees and closing costs can eat into any savings you’ll gain by refinancing. You might face penalties for paying off your existing mortgage early.
- Depending on the type of mortgage, you may ultimately pay more in interest than with your original mortgage. Switching from a fixed-rate mortgage to an adjustable rate one might mean facing higher interest rates.
- Taking equity out of your house means you owe more money.
- Getting approved for a new mortgage may be difficult as banks tighten their lending requirements.
- Taking cash out may decrease your equity in the home, triggering a lender’s requirement that you carry PMI.
- Depending on the length or term of your new loan, it may take much longer to pay off than it would have under your original loan.
Can you think of any other pros and cons to refinancing? Check out our Refinancing Calculator to run some scenarios to see if refinancing is the right choice for you.