Refinancing: Pros and Cons
Financial goals and plans often change. When this happens, you can refinance. Refinancing is paying off the balance of an old loan with a new loan that has better terms. Refinancing should only be done if it puts you in a better place financially or accomplishes a goal.
Pros
- Saving Money with a Lower Interest Rate
- The main reason people refinance is to get a better interest rate. By getting a lower interest rate, you save money immediately and in the long run. The most savings can be seen in long-term loans or loans with a high dollar amount attached to them.
- Lower Payments
- A lower monthly payment can be a result of refinancing. You often extend the amount of time you’ll take to repay a loan. Since your balance is most likely smaller than your original balance, you have more time to repay which means the new monthly payment should decrease.
- Shorten the Loan Term
- On the other hand, you can also refinance into a shorter-term loan. For example, you might have a 30-year home loan that can be refinanced into a 15-year home loan which can result in a lower interest rate. You can also choose to make extra payments instead of refinancing to avoid paying closing costs and keep the flexibility of not being required to make larger payments.
- Consolidate Debts
- If you have multiple loans, refinancing into one may be a good option for a lower interest rate and also to only keep track of one payment.
- Change the Type of Loan
- If you have a variable-rate loan, you might want to switch to a fixed rate. A fixed interest rate offers protection if rates are currently low, but expected to rise.
Cons
- Transaction Costs
- Home loans come with closing costs. You’ll want to make sure that you won’t end up paying more in fees than you would save in the long run.
- Higher Interest Rates
- When you make payments over an extended period, you pay more interest on your debt. You might enjoy lower monthly payments, but that benefit can be offset by the higher lifetime cost of borrowing. Be sure you know how much it will really cost to refinance.
If you are considering refinancing, you may have questions and it’s best to ask them all ahead of time before you end up in a worse situation. First Ohio Home Finance offers a free mortgage analysis. Contact us to get your free mortgage analysis and start saving money on your home loan.
