Pros and Cons of Refinancing My Home

Reader Question: I own a home and I hear a lot of people talking about refinancing and what a great thing it is. I am not that savvy on the whole thing. Can you please tell me what are the pros and cons of refinancing a home mortgage?

Sure, I’d be happy to help you understand the pros and cons of this process. Let me start with the pros of a refinance loan.

The Pros

People refinance their homes for several different reasons, or even for a combination of reasons. The most common motivation is to save money. If you can get a lower interest rate on the new home loan (after refinancing the old one), you might be able to save a lot of money over the life of the new mortgage. You can get a lower rate in several ways — by improving your credit, by taking advantage of lower nationwide lending rates, or a combination of the two.

Right now, a lot of people are refinancing because interest rates are so low. If you do it right, and if the money you save is greater than the amount you pay in closing costs, then a mortgage refinance could make a lot of sense. So that’s one of the pros of refinancing your home. You could save money in the long run.

Here’s another common reason for a refi loan. Many people use this financing tool to switch from an adjustable-rate mortgage (ARM) to a more predictable fixed-rate mortgage. The benefit here is that you can avoid the uncertainty of the ARM loan when it hits the adjustment period. In many cases, it’s possible to combine this with the previous concept, thereby getting a lower interest rate at the same time. Double benefits! This is why refinancing an ARM loan is such a popular strategy among homeowners.

The Cons

This wouldn’t be a well-rounded article on refinancing pros and cons if we didn’t talk about the downside to this process. In truth, the only time there’s a real downside is when a refinance costs you more than it saves you. For example, if you end up spending more in closing costs than you save over the life of the new loan (through an interest rate reduction), then refinancing your home doesn’t make sense. Under those circumstances, it’s not financially beneficial to refinance the mortgage. So in that regard, this is one of the cons of a refi loan.

Of course, this is easily avoided. You just have to do the math ahead of time to see if refinancing makes sense for you. Some states go so far as making this a law — if the refinance loan doesn’t benefit the borrower, the lender is not allowed to make the loan. That’s the way it is here in Texas, where I live, and in many other states (but not all).

Is Refinancing Right for You?

I talked about “doing the math” to find out if a mortgage refi makes sense in your particular situation. The key here is to determine the break-even point, or BEP. This is the point after which it’s financially beneficial to refinance the loan (i.e., you save more than you spend). Here’s an article that explains when it doesn’t make sense, and you can learn more about the break-even point in this article about mortgage refi costs.

I hope this helps you understand the pros and cons of refinancing a little better. If you have any more questions, feel free to enter them into the Q&A box at the top of the blog.

Good luck, and happy holidays.

~Brandon

Filed under: Refinance Questions