There may be many different reasons why you want to refinance. The reason is not as important as understanding what you are getting into. You should be aware of the pros and cons of refinancing your home. Before we get into that, though, ensure you are prepared to start the process. You need to have all the information they will be requesting ready to go. Make sure that you have some equity built up, and double-check to ensure that your lender is willing to work with you.
With that being said, let’s jump into the good and the bad of refinancing.
Pros of Refinancing Your Home
There can be many positive aspects attached to refinancing your home loan, but you must be careful who you choose as a lender. Do not ever assume that one lender is the same as them all because nothing could be farther from the truth. You will want to find a lender to give you good terms with a low-interest rate. Otherwise, you are wasting your time.
- Pay Off Your Loan Faster – You can set yourself up on a loan with shorter terms. For example, you could go from a 30-year mortgage to a 20-year one. This will make it nice for you if you plan on retiring sooner than expected because you will not have the mortgage payments to deal with.
- Pay A Shorter Payoff Term – If the interest rates are lower than your original loan (which you have made sure of), you will be paying around the same amount per month or even less. This means you will get out from under the loan in less time.
- Cash Out Your Equity – If you want to pay off some debt, remodel the house, or make a big purchase, you can get a refinance loan for the value of your home. This is known as cashing in on your equity. The money you still owe on the original loan will be taken out of the new one, and whatever is left over gets handed to you.
When you want to refinance a home loan, you need to understand all of its positive aspects of it. But you also need to weigh the negative aspects coming up next.
Cons of Refinancing Your Home
Unfortunately, anything that positively impacts something will also have some negative ones. Refinancing a home loan is no different. Let’s jump right into it.
- Breaking Even May Not Happen – When refinancing a loan, you need to look at the big picture. It may seem like a good idea to get a new loan, but it is possible that you may not even break even, let alone get ahead. You need to do all the math and see if you will ever break even before you pay it off all the way. If not, do not waste time doing it.
- Your Monthly Payment Could Rise – This was discussed a little above, but the new loan may increase your monthly payment. If that was the plan, do not worry about it, but you need to be aware that it could happen before filling out an application.
- Lower Your Equity – The biggest con of taking out a refinance loan is that it may lower the equity you have built on the house. If you are only getting enough money to pay off the loan, once you pay the closing costs, you will be better off, as long as the interest rates are lower. If you are cashing out, though, you will be starting all over with your equity building.
If the negative aspects of the new loan outweigh the positive, you will need to pass on it. Be aware that it may seem like you have lost ground at the beginning of the new loan, but that may not be the case if you dig into it a little deeper.
Refinancing your home loan comes with some pros and some cons. Each of them will affect you differently because you have unique circumstances specific to your life. You need to decide if the pros outweigh the cons. If they do, then it is suggested that you go for it. If not, do not give up. Use an online comparison site, such as iSelect, and see if you can get an offer that is beneficial from another lender.