Refinancing your home can be a great way to save money, but it's important to understand the pros and cons before making a decision. The number one disadvantage of refinancing is that it costs money. You'll have to pay most of the same closing costs you had when you first bought the house, including opening fees, title insurance, application fees, and closing fees. You can refinance your mortgage and convert it into a new loan with a shorter term (for example, go from a 30-year loan to a 15-year loan).
By shortening the term of your loan, you'll get more equity in the home more quickly and you'll pay off the loan faster. That means you'll own your home without paying first and you'll get benefits such as saving money in interest and having more money each month when you no longer have to pay your mortgage. When trying to determine if you should refinance your mortgage, decide why you want to refinance it and determine if it will benefit you based on interest rates, how long you will extend or shorten the term of your loan, and how long you plan to stay in the home. In fact, you'll most likely have to pay thousands of dollars in closing costs, including a loan origination fee, an appraisal, and title insurance. Refinancing your home isn't something you can do in a day.
It takes a lot of resources, time and money to ensure a lower rate. This can be exhausting for your life, especially if you don't see a major change in payments or interest. For example, if you've been on a 30-year mortgage for several years, you've paid a large amount of interest without reducing your principal balance too much. Refinancing a 15-year mortgage will likely increase your monthly payment, possibly to a level you won't be able to afford. If you start over with a new 30-year mortgage, you'll start with almost as much equity as last time.
While your new interest rate will be lower, you'll pay it for 30 years. So, your long-term savings could be negligible, or the loan could eventually cost you more. If reducing your monthly payment prevents you from failing to meet a higher current payment, this long-term reality may seem acceptable to you. Refinancing at a lower interest rate doesn't always translate into substantial savings. Let's say the interest rate on your 30-year fixed-rate mortgage is already quite low, say 5%.
In that case, you wouldn't be saving so much if you refinanced another 30-year mortgage set at 4.5%. Once you factor in closing costs, your monthly savings won't be significant unless you have a mortgage several times higher than the national average. While refinancing can save money, it's important to remember that refinancing involves costs that could nullify this benefit or weaken it. It's important to evaluate your budget and see if refinancing is the right decision and how much money you would save. And if you can refinance the loan with a lower interest rate, your monthly payment could decrease even lower.
Remember that you still have the option to refinance for less than 30 years (usually 10, 15, or 20 years). As an alternative to a home equity loan, you can refinance and withdraw a portion of your home equity. Refinancing a mortgage can have great benefits, but the benefits depend on the terms of the refinance and on your individual situation and objectives. If you're currently struggling to pay your bills and want to keep your mortgage loan in good standing, refinancing may be a necessary option. As you can see in the example above, the savings from refinancing may be minimal and you'll need to consider whether it's worth the effort invested in refinancing your loan and the length of the refinancing process. Find out what your closing costs will be if you refinance and contact them at their break-even point: the time it will take to recover the money it costs to refinance.
If it will take you three years to recover the costs of a refinance and you plan to move within two years, that means you're not saving money at all despite lower monthly payments. Refinancing for another 30-year term after making payments for years and accumulating capital will reduce the principal of your loan, which in turn will reduce your monthly payments and free up space in your budget for other financial goals. If you currently have an adjustable rate mortgage (ARM), refinancing at a fixed interest rate will give you more stability in your monthly principal and interest payments. While there are no regulations that limit how often you can refinance your home, lenders often set their own limits. Refinancing your home may give you more flexibility, but there are some conditions you'll need to meet first.