Pondering a mortgage refinance? There’s a lot to consider before pulling the trigger on this significant financial decision. Namely, how would a refi benefit you? What are the pros and cons of refinancing your home? Do the benefits of refinancing your home outweigh any disadvantages? And what refinancing alternatives exist?
Trust this handy guide to help you navigate the pluses and minuses of a refi.
Get started here to see what rates you qualify for.
- Refinancing can be beneficial for reducing monthly payments, shortening or extending loan terms, or tapping into home equity.
- Refinancing also has potential downsides that may offset the advantages, such as upfront fees, increased total costs if extending the loan term, and additional paperwork.
- Alternatives to refinancing include pursuing a HELOC, home equity loan, mortgage recasting, or loan modification, each offering different ways to manage costs without a full refinance.
Pros of Mortgage Refinancing
It doesn’t make much sense to refinance your mortgage loan unless you stand to benefit in some way , usually by improving your financial position via more affordable payments, a quicker payoff, or the ability to liquidate home equity. Here’s a roundup of the most common advantages a refinance provides borrowers.
Reduce Monthly Payments
Refinancing to a lower interest rate can reduce monthly payments, providing immediate savings that improve cash flow.
This is particularly helpful if you are facing other financial challenges, as it allows you to allocate funds toward other expenses or savings. Lower monthly payments can create breathing room in your budget without compromising on other financial goals.
Additionally, if you must pay private mortgage insurance (PMI) because you put down less than 20% on your home but have since raised your equity position past 20%, refinancing can eliminate PMI, lowering monthly mortgage payments.
Note: Refinancing isn’t required to cancel PMI on a conventional mortgage. Learn how and when to cancel PMI here.
Or, even if you don’t lower your interest rate or eliminate PMI through refinancing, you can create more affordable monthly payments by extending your loan term.
For example:
| Loan Scenario | Loan Amount | Interest Rate | Loan Term | Monthly Payment | Total Interest Paid |
| Before Refinance | $250,000 | 7.0% | 30 Year | $1,663 | —- |
| After Refinance | $250,000 | 6.0% | 15 Year | $2,041 | Saves $171,588 in total interest |
Pay Off Your Loan Faster
Refinancing to a shorter loan term, like a 15-year mortgage, allows you to pay off your loan faster. Although this increases monthly payments, it reduces the total interest paid over the loan’s life and accelerates equity buildup. This strategy is good if you want to reduce debt and own your home outright sooner.
Another way to accelerate your mortgage debt repayment is to opt for a “cash-in” refinance, where you refinance your mortgage and contribute a lump sum payment toward the principal balance, lowering the amount you need to borrow. This reduction in loan size can help you secure a lower interest rate or better loan terms. Additionally, paying down the balance may help you avoid paying private mortgage insurance (PMI) if your loan-to-value (LTV) ratio drops below 80%.
Save On Interest Costs
Refinancing to a lower interest rate or a shorter loan term can significantly reduce the total interest paid over the life of the loan. A rate reduction of just one percentage point (100 basis points) could save you tens of thousands of dollars on a 30-year mortgage. Choosing a shorter term, like a 15-year mortgage, can also help you build equity more quickly, reduce interest payments, and pay off your home sooner.
Use our free refinance calculator to see how much you could save with an interest rate reduction.
Access Equity For Paying Off Debt or Home Improvements
A cash-out refinance allows homeowners to replace their current mortgage with a new one and access equity in their property as cash at closing. Cash-out refinances enable homeowners to use their home equity to cover expenses they might not otherwise afford, such as medical costs, home renovations, debt consolidation, and other large purchases.
This option typically offers lower rates than credit cards or personal loans, and any improvements made to your home could increase its value, potentially improving your return on investment if you sell.
Just keep in mind that cash-out refinances may require a slightly higher interest rate – often one-eighth to one-quarter of a percentage point higher – than standard refinances.
Check your cash-out refi eligibility here!
More Predictable Monthly Payments
Got an adjustable-rate mortgage (ARM) but want more predictable payments? Refinance that ARM to a new fixed-rate mortgage loan.
This can be especially helpful if you expect interest rates to rise later, as a fixed-rate loan locks in your rate and shields you from possible increases, giving you peace of mind with stable budgeting.Cons of Refinancing
As with any financial decision, you shouldn’t overlook the tradeoffs and potential disadvantages of committing to a mortgage refinance.
Cons of Mortgage Refinancing
As with any financial decision, you shouldn’t overlook the tradeoffs and potential disadvantages of committing to a mortgage refinance.
It Takes Time to Recoup the Initial Costs
Refinancing involves upfront costs, such as closing fees, appraisal charges, and lender fees, which typically total 2-5% of the loan amount.
Depending on how much you save each month, recouping these costs can take several years. You want to be sure to consider how long you plan to stay in your home before refinancing.
For example, if your closing costs are $5,000 and you save $200 per month by refinancing, it will take approximately 25 months, or just over 2 years, to break even.
Use our refinance break-even calculator to model your personal scenario.
Extending Your Loan Term Could Increase Long-Term Costs
Lengthening your mortgage term to reduce monthly payments can increase the total cost of your loan in the long run. If you refinance a 30-year loan after five years, you might end up paying interest for an additional five years, increasing the overall loan cost. Weigh the immediate benefit of lower monthly payments against the long-term impact of more interest payments.
Decreasing Your Loan Term Could Increase Monthly Payments
While refinancing to a shorter term, such as from a 30-year to a 15-year mortgage, can help you pay off your loan more quickly and save on interest, it often comes with a higher monthly payment.
This can put a strain on your monthly budget, particularly if your income fluctuates or you have other financial obligations.
The bottom line? While the benefits here likely outweigh the drawbacks, ensure you can comfortably manage the higher payments before shifting to a shorter loan term.
Taking Cash Out Could Reduce Your Equity
A cash-out refinance involves borrowing against the equity you’ve built in your home, which reduces your ownership stake. While this can provide cash for urgent expenses or investments, it means owing more on your mortgage and having less equity as a cushion. If home values drop, you could owe more than your home is worth, which is risky if you need to sell or refinance again.
Your Credit Score Might Be Impacted
Refinancing also involves a hard credit inquiry, which can cause a small, temporary drop in your credit score. This could be inconvenient if you’re planning to apply for another type of credit soon, such as a car loan.
You Might Owe PMI
If your new loan exceeds 80% of your home’s value, you may also be required to carry private mortgage insurance (PMI). The added cost of PMI could reduce or even cancel out the savings you hoped to gain from refinancing.
Alternatives to Refinancing Your Mortgage
Refinancing isn’t your only choice. Here are some financial alternatives to consider:
- Home equity loan: This financing option allows you to access a lump sum of your home’s equity, typically at a higher interest rate than your primary mortgage. Your existing mortgage isn’t affected, but the home equity loan gives you additional funds for major expenses.
- Home equity line of credit (HELOC): A HELOC offers flexibility by allowing you to borrow against your home’s equity as needed. You can draw from this line of credit over time, making it a convenient option for funding large costs.
- Mortgage recasting: This option enables you to reduce your monthly payments by making a lump-sum payment toward the principal. Unlike refinancing, recasting doesn’t change your loan’s interest rate or term but can offer immediate financial relief.
- Loan modification: If you’re experiencing financial difficulties, a loan modification can adjust the terms of your existing mortgage to make payments more manageable. While it may impact your credit, it doesn’t involve replacing your loan entirely.
The Pros and Cons Depend On Your Unique Situation
Like any major financial choice, it’s important to carefully consider the advantages and disadvantages to decide if refinancing is worth it. Generally, if the numbers work in your favor in either the short or long term, and you plan to stay in place long enough to save enough on the loan to cover closing costs, refinancing could make good sense.
Still in doubt? Talk with a Refi.com loan expert to help you weigh your options.
