If life has thrown you a curveball, you may find yourself strapped for cash and unable to make mortgage payments you once paid with ease. From medical bills to tuition payments, sometimes even an extra $100 a month can make a huge difference. Or perhaps you agreed to a bad home loan from the beginning, and you wish to acquire better terms. You may wish to explore refinancing, which is the process of attaining a new mortgage (with new terms) to pay off an existing mortgage. Refinancing a loan can save you money in the long term, and cashing out your equity can provide you with some immediate cash. But before you jump in and start signing the paperwork, familiarize yourself with the pros and cons of refinancing a home.
Pros and Cons of Refinancing a Home
Let’s start with the benefits of refinancing a home:
- You Can Save Money on Interest: Refinancing can save you money on interest, which could lower your monthly payment by a couple hundred dollars. A study published in the Journal of Economics found that in 2010, 20 percent of Americans who were eligible chose not to refinance their home. As a result, the average family sacrificed $11,500 in savings over time (source).
- You Can Shorten the Loan Term: In addition to lowering your monthly payment, you could shorten your mortgage’s loan term. The more years you spend paying off your loan, the more interest you will end up owing.
- You Can Switch to a Fixed Rate: If you have an adjustable rate mortgage, you can switch to a fixed-rate loan. You might not save money right away, but you can rest easy knowing that your rate won’t drastically increase one day.
- You Can Cash Out Equity: Refinancing a home can allow you to cash out on your home’s equity. Avoid using this equity to pay for nonessentials, like a vacation or new clothes. Instead, save this extra cash to consolidate debt or make an important investment. For example, you could make home repairs, put the money toward your children’s college tuition, or start a new business.
Although there are certainly some perks to refinancing a home, there are also strings attached:
- You May Not Benefit: Not everyone can benefit from refinancing a home. If your credit or income hasn’t changed for the better since you first applied for your loan, you most likely won’t qualify for a better loan.
- Penalties May Apply: Check your original home loan’s contract. Does it include a penalty fee for paying it off early? If the fee is hefty, it might not be worth it to refinance your loan. If you refinance with the same lender, however, they might waive the penalty.
- Closing Costs Apply: Remember those pesky closing costs from the first time you closed on your home? Unfortunately, there will be more. Closing costs range between three and six percent of your loan’s current balance. These fees cover the cost to have your house appraised, your application fee, a title search, your credit report search, and more. In some cases, you might need to pay a fee for mortgage insurance.
- Appraisals Can Be Frustrating: Sometimes appraisals can cause a bit of a headache in the refinancing process. In order to get your home refinanced, most lenders require some equity. An appraiser will help determine how much equity you have based on your home’s value. You’ll need to work with a trustworthy appraiser to avoid getting a low-ball appraisal.
- It’s a Relatively Long-Term Commitment: Keep in mind that if you choose to refinance, you’ll want to stay in the same house for a few years in order to actually recoup all the fees. It can take about 24–32 months before you start to break even on your efforts.
Now that you’ve learned some of the pros and cons of refinancing a home, are you ready to get started? If you’re interested in refinancing your home loan and you live near Springfield, Missouri, contact PrimeLending today. Our team of home loan experts focuses on making every step of the refinancing process simple, transparent, and rewarding. With our expertise and commitment to clear and timely communication, we can guide you through the process from application to closing. To get started, please call 417-616-0777 or contact us online. We look forward to helping you save money!