About 70 percent of homeowners in the United States have a mortgage.
With property prices steadily increasing, taking out a mortgage is the only way most people are able to own a home. However, a mortgage is a hefty financial commitment, meaning you might struggle to stay on top of payments.
Here is where mortgage refinancing comes in. You might be able to secure a new home loan with better terms.
Before you take this step, though, it helps to know the pros and cons of refinancing. Read on!
Refinancing Can Get You a Lower Interest Rates
On average, a 30-year fixed-rate mortgage attracts an annual interest rate of 4.12%. But depending on your credit score, your rate can be as low as 3.25% or as high as 7.84%.
Now, let’s say you took out your current mortgage has a 6% interest because that’s the best you could get with your credit history at the time. A decade later, your credit and income have improved significantly.
In this case, refinancing can help you secure a new mortgage with a lower interest rate. For instance, securing a new loan at 3.25% interest (down from 6%) will make a big difference in your monthly repayments.
Refinancing Enables You to Change Mortgage Type
There are two types of mortgages: fixed-rate and variable rate.
A fixed-rate loan means your interest rate will remain the same throughout the entire term of the loan. On the other hand, the interest rate for a variable rate loan will keep changing from month to month, depending on economic conditions and other factors.
Each has its own pros and cons, but depending on your specific circumstances, you might want to change from a fixed rate to a variable rate loan and vice versa.
If you took out a variable rate home loan and you dislike the uncertainty that comes along with it, you can refinance and secure a fixed-rate loan.
Refinancing Costs Can Be Discouraging
When buying a home, one of the things you had to deal with was closing costs. If you thought you were done with them, mortgage refinancing will bring back the memories! You’ll part with loan origination fees, home appraisal fees, title search fees, and whatnot.
Although refinancing costs vary from lender to lender, most require you to pay out-of-pocket. If you don’t have the money at your disposal, then you might need to put off refinancing for some time.
The Mortgage Refinancing Application Process Can Be a Pain
Just because you’re a current mortgage holder doesn’t necessarily mean your refinancing application will get the nod.
In fact, the process is just as bureaucratic as your first mortgage application, and if your income has reduced or your credit score has tanked, your application could fail. This can be crushing, especially if you’re in a tight financial spot and could do with lower mortgage payments.
The Pros and Cons of Refinancing: Make Your Choice
Now that you know the pros and cons of refinancing, you’re in a stronger position to evaluate whether to refinance or not. In general, though, refinancing, as long as you have strong credit and your income hasn’t reduced, can be a prudent move.
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