What Are the Pros and Cons of Refinancing?
Posted by Jennifer Quilter
This is actually very dependent on what your goals are and what your current terms are, and how you go about doing things, but here I will list the possible pros and cons of refinancing depending on how you go about things.
What are the pros of refinancing?
Lower interest rates is one of the best reasons to refinance. As a general rule of thumb, if you can get 2% lower rates you should calculate your costs out as it will likely be worth it.
To obtain a fixed interest rate. If you are uncomfortable with an adjustable rate and worried about the rate increasing, you can refinance for a fixed rate.
To pay off high interest debts or fund home improvement projects you can get a loan for a larger amount than your owe on your house.
You can extend the life of your loan. While you will pay more in total interest, this will lessen the amount you pay each month.
What are the cons of refinancing?
Refinancing is the act of obtaining a whole new loan. You have to pay the closing costs on your original loan including any prepayment penalties.
If you do not calculate all fees associated with closing the original loan and starting the new loan versus any savings you might be counting on with your new interest rate then you could end up losing money.
If you are borrowing more money by refinancing and haven’t planned out your new budget carefully and miss payments you could risk losing your home.
It usually takes three years to realize the financial benefits so if you won’t be staying with the loan for that long it is generally not worth the costs and trouble.
In conclusion, what are the pros and cons of refinancing?
While there are various goals which change individual pro lists, it really comes down to a balance of numbers, and a careful consideration of the long term effects. If you consider all aspects and keep track of all of the numbers realistically with a calculator, you should be able to easily see if the numbers make sense for pursuing refinancing.