Now is the perfect time to refinance your mortgage. With rates still very low, many homeowners have rushed to lenders to lower their monthly rate. Before you go in and get it done, we want to provide you with more information on what you’re getting yourself into. Keep reading on to get the pros and cons of refinancing your mortgage.
THE PROS OF REFINANCING YOUR MORTGAGE
First we’ll go into the pros. Below we detailed each one.
-Lock in a better interest rate: This is the obvious reason that people refinance their loan. If you for example purchased your home at 7% interest, refinancing allows you to decrease that to lets say, 4.5% so that you pay less over the life of the loan. This makes a big difference in the long run and will be more money in your pocket. This will also lower you monthly payments.
-Pay off your home sooner: Let’s say that you have a home at the common 30 year mortgage contract. Now that your rate is lower and your monthly payments are lower, you may be able to afford doing a 15-year loan. This way, you not only will pay off your home sooner but you will pay less in interest.
-Tap into your equity: One of the pluses of being a homeowner is collecting equity from the home. You can do a “cash out refinance” meaning that you can take out that equity and use it towards maybe paying off debt or other things. There are no limits on how you choose to spend your equity.
-Get rid of PMI (Private Mortgage Insurance): Private mortgage insurance is an additional payment on your mortgage when you put down less than 20%. This is the lender’s way of ensuring protection for lending out the money for your home and it is usually required by the lender and provided by private insurance companies. When you refinance, you have the option to remove this if you already have 20% of your loan paid off. Some home loans will have this automatically drop off but for home loans such as FHA, refinancing is required to remove it.
THE CONS OF REFINANCING YOUR MORTGAGE
Below we have detailed the cons. Keep reading on for more information!
-You will have to pay closing costs
Just like when you first purchase a home, you will have to pay closing costs. Closing costs include things like legal fees, to an appraisal to a loan origination fee. These costs are typically 3-6 percent of your mortgage principle, so you have to be ready to pay at least a few thousand dollars. Some lenders will advertise doing a no closing cost refinance but they will still factor in the cost overtime, such as a higher interest rate or paying a little bit extra every month. Regardless, do your research and calculations so that you are prepared when they present you with the bill for refinancing.
-Monthly payments could be higher
Refinancing into a shorter term mortgage is a great way to pay it off sooner and save money in the long run. If you have 25 years left out of a 30 year mortgage and refinance to a 15 year mortgage with that goal in mind, your monthly payments will increase. If this is an option you want to do (you don’t have to refinance to a shorter term loan) make sure to factor it into your monthly budget.
-Increasing your term length will cost you in the long run
Lets say you want to do the opposite and extend the term of your loan. You have a 30 year loan, with 22 years left to pay, but want to make it 25 so that you have a lower monthly payment. Although your rate will probably be lower than it was prior to the refinance, you will have another 3 years of paying interest. When taking this route, be aware of what you’re getting into and although the monthly payments will be less, know that it will be more expensive in the long run.
Now that you’re more equipped with the knowledge of refinancing your mortgage, it will help you make better decisions when negotiating with your lender. Refinancing can be a great opportunity for you and possibly save you tons of cash in the long run. Just know that you have other options as well and empowering yourself with research will help you decide what is best for you.