What are some pros and cons of refinancing?

Posted by  on Jun 16, 2011

Refinancing can potentially save tens of thousands of dollars over the life of your mortgage. When current mortgage rates are low, you may wonder if refinancing can save you money. Depending upon your mortgage rate you could slash your monthly bill significantly. However, there are pros and cons to refinancing, so it's important to consider as many of them as possible.

Pros for refinancing

  • Refinancing when rates are low can allow you to trade in your higher interest mortgage for one with more manageable payments. Many mortgage experts give the green light to refinancing if you can shave at least one percent off your mortgage rate.
  • You have excellent credit and little debt. It is a tough lending environment, but many mortgage lenders are extending credit to people with the best credit scores. Having a credit score of 740 or higher will likely get you the best mortgage rates. Having a score in the high 600s won't automatically squash your plans to refinance, but expect to undergo tougher scrutiny by mortgage lenders.
  • You have a decent amount of home equity. Maybe you've paid down a lot of principal since you got your mortgage or your home has appreciated. Having significant home equity could work in your favor when applying to refinance. Some mortgage lenders may be more inclined to work with you if you have at least 20 percent equity in your home.

Cons for refinancing

  • You don't plan to remain in your home much longer. Refinancing involves fees and closing costs. So when you shop around to compare mortgages it is important to understand exactly what borrowing money is going to cost you. When getting quotes from mortgage lenders make sure they explain these costs and when you can expect to break even. For instance, if it will take three years to recoup the cost of getting a mortgage, refinancing makes no sense if you plan to move in two.
  • Refinancing would cost you more in the long run. If you have been paying on your mortgage for many years, understand that refinancing starts that 30-year clock over again. Even with a lower rate, you might end up paying more by refinancing than by leaving your mortgage alone. Consult a refinance calculator to see if this is so.
  • You live in an area that has been hit hard by foreclosures. While you may have a nice property, your appraisal is going to be affected by all of those foreclosures. That's because home appraisers look not only at your house, but those in the surrounding neighborhood.

How to find the best mortgage lenders

Take time to shop around and compare mortgage rates and lenders. Ask as many questions as you can think of to help sort out the pros and cons of refinancing. Refinancing makes sense for many homeowners but not for all.


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