What Are the Pros and Cons of Refinancing Your Home?
Buying your house was definitely the right choice, but now that you’ve been paying on your loan a little while, you’re starting to wonder if you should take advantage of some of the mortgage rates that are being offered to homeowners willing to refinance. After all, you, too, would enjoy a lower monthly payment and some cash in your pocket. But there has to be some sort of catch, right?
The Pros and Cons of Refinancing
There’s never one answer to the question “should I refinance my home?” There are so many factors involved that it becomes a deeply personal choice for each homeowner and their family, based on what they’re doing today and what they plan on doing tomorrow. Like many things in the financial world, there are advantages for some that are serious disadvantages for others and great benefits that come with major risk. Let’s examine those pros and cons in some detail.
The Benefits of Refinancing Your Mortgage
If you’re still early in your mortgage, there can be a lot of benefits to refinancing. After all, you’re mostly paying down interest right now, so a better rate can have a major impact on your long term costs. Then again, even if you’re further along in your loan, a refinance can save you money in other ways, so there’s really something for everyone, like:
Better loan terms. Refinancing is often about getting a better deal on your mortgage payment. This may mean a significantly better interest rate, a lower mortgage insurance premium or no mortgage insurance at all, turning an adjustable rate loan into a fixed rate loan so you can more easily plan your future, or even paying off a balloon payment that’s looming.
An easy way to improve your home and increase its value. There’s nothing better than a house that pays for its own improvements and increases its own value in the doing (now, if only it would self-clean). You can refinance to tap that equity if there’s some reason that it makes more sense to do so rather than to explore home equity loans or a HELOC.
Cash for other investments. Homes that are mostly paid down can turn into interesting places to raise funds for other investments. Now, before you go and tap your equity for Bitcoin, keep in mind that if you don’t make your payment, you’re going to lose your home. Gamble wisely.
The Drawbacks to Refinancing Your Home
Of course, refinancing your home isn’t all sunshine and roses and cash flowing free in the breeze. There are some negatives to think about when you’re trying to make this decision. Besides the added expense and effort of actually getting the loan, think about these points carefully before signing on the dotted line:
You’re very likely going to extend your loan term. Sure, the payment’s suddenly lower, but that’s because you took a 30 year loan that you had already paid on for 10 years and refinanced it into another 30 year loan (in effect, creating a 40 year mortgage).
The market isn’t always stable, but your mortgage debt will be. In other words, if you needed to sell, or refinance again for some reason, the market might not be on your side. Today’s $300,000 house could be tomorrow’s $150,000 house, depending on the volatility of your market. Whatever you borrow is what you’ll have to get back out if you were to sell that house, unless you plan to bring a large check to closing.
In many states, the original mortgage protects you from deficiency judgments after foreclosure (but your refinance won't). Hey, foreclosure is a dirty word, but it’s a very real concern, even as the real estate market recovers. If you refinance, you lose any protection from being sued for the difference between what you owed and what your lender was able to sell your house for, otherwise known as a deficiency, that you may have had. This applies in “non-recourse” states (Alaska, Arizona, California, Hawaii, Minnesota, Montana, Nevada, North Dakota, Oklahoma, Oregon and Washington), but also in many “recourse” states, especially if your home is your only real asset.
The pluses and minuses of any mortgage refinance will depend largely on your circumstances and your current mortgage terms.