When you purchase your dream home, chances are you don’t think about the possibility of refinancing down the line. However, there are several scenarios when it may be something to consider.
According to First Savings Mortgage, people refinance their home for a variety of reasons, including obtaining a better rate, changing the terms of their loan and borrowing more funds.
If you’re considering refinancing, here are some pros and cons, according to Next Advisor.
Pro: Lower monthly payments
When you have a lower monthly payment, it can make it easier to pay your mortgage when its due each month. It also allows you to have more money to pay for expenses and other debts, according to Bank of America.
Pro: Shorter loan term
Refinancing your home can also lead to a shorter loan term, meaning you’ll save a noticeable amount of money in the long run.
“Refinancing from a 30-year, fixed-rate mortgage into a 15-year fixed loan can result in paying down your loan sooner and saving lots of dollars otherwise spent on interest. You’ll own your home outright and be free of mortgage debt much sooner than normal,” Bankrate reported.
Pro: Paying off mortgage more quickly
Once again, a pro of refinancing is saving money. The faster you pay off your mortgage, the less money you’ll pay over time.
To pay it off early, RocketMortgage suggests switching to a biweekly payment schedule, making one additional payment a year and refinancing to a shorter loan term.
Con: Closing costs
Refinancing isn’t free. According to LendingTree, closing costs usually range from 2% to 6% of your loan amount, depending on its size. Data from real estate and technology firm ClosingCorp showed that in 2020, the national average refinancing closing costs were $3,398 with taxes and $2,287 without taxes.
Common costs include the application fee, origination/underwriting fee, a home appraisal and a credit report fee, among others.
Con: Planning to move soon
If you won’t be staying in your home for the next few years, refinancing won’t make sense. Money.com reported packing up and leaving “will likely only waste your time and money. Selling too soon after refinancing means you won’t live in your home long enough to capture the savings benefits of lower rates. Plus, you’ll still owe any fees associated with the new loan.”
Con: Longer loan term
Just as refinancing can give you a shorter loan term, there’s also the opposite end of the spectrum — a longer-term loan.
While this can decrease how much you pay each month, it can also result in higher interest payments overall, according to Experian.