Should You Consider Refinancing? Key Points to Think About

From eliminating private mortgage insurance (PMI) and lowering your interest rate to pulling cash out for renovations, millions of homeowners could find that refinancing makes financial sense.

If you’ve ever asked yourself whether a refinance is worth it, here’s a breakdown of the basics to help you decide if it could be the right move for you.

What Does It Mean to Refinance?

Refinancing is when you replace your current mortgage with a new loan.

The two most common types are:

• Rate-and-term refinance: Replace your existing loan with a new one to lock in a lower rate, shorten your loan term, or both.
• Cash-out refinance: Borrow more than what you owe on your home. After covering the existing mortgage and fees, you receive the difference in cash. Homeowners often use this option for home improvements, debt payoff, or building savings.

Pros and Cons of Refinancing

Refinancing can be a powerful tool, but it isn’t a one-size-fits-all solution. Consider both the advantages and drawbacks before moving forward.

Advantages:

• Lower monthly payments: A reduced rate could shrink your payment and free up cash.
• Faster payoff: Moving from a 30-year loan to a 15-year loan saves on interest and builds equity quicker.
• Drop PMI: If your home’s value has risen, refinancing may allow you to remove private mortgage insurance.
• Access cash: A cash-out refinance gives you funds for projects, debt consolidation, or investments.
• Stability: Switching from an adjustable-rate mortgage to a fixed-rate loan offers predictable payments.

Potential drawbacks:

• Upfront costs: Closing costs often run into thousands of dollars.
• Prepayment penalties: Some lenders charge fees for paying off your old loan early.
• Longer payoff timeline: Returning to a 30-year loan could mean paying more interest over time, even if the monthly payment is lower.

Refinancing Costs

The fees for refinancing often look similar to what you paid when you first bought your home, such as:

• Appraisal
• Origination
• Title
• Recording fees

On average, expect costs of around $5,000, though this varies.

Some lenders offer “no-closing-cost” refinances, which roll expenses into your balance. This may help upfront, but you will pay interest on those costs over the life of the loan.