The Pros and Cons of Refinancing

Everyone is going to have their own individuals lists of the pros and cons of refinancing because everyone will do this slightly differently and have their own motivations, but a look at the basics for both sides can help you make an informed decision about whether to move forward with your own plans.

The Pros of Refinancing

Arguably the best reason to move forward is if you've found a lower interest rate. Maybe your credit score has improved, or maybe the market is more favorable-either way a lower interest rate can save you a great deal of money over the term of your loan. Generally speaking, as a rule of thumb, it is worth pursuing if you can find a two percent lower rate.

If your monthly income is currently unmanageable you can negotiate lower monthly payments on your new loan. Of course, this will extend the life of the loan, and cost you more money in interest in the long run, but if you need to lower your monthly outgoings now this is an option.

You can switch to a fixed interest rate, or to an adjustable one. Starting over lets you remake all of these decisions.

If you do a cash out refinance you can use this as an opportunity to pay off high interest debts or use the money for home improvement projects. Your home payments are tax deductible and offer lower interest rates than other borrowing options.

The Cons of Refinancing

The upfront costs, especially if you have a prepayment penalty on your original loan, is decidedly the biggest negative for refinancing, especially if they won't be made up by money you are saving on a lower interest rate. As far as negatives go, this one rules all the others.

Experts say that on average it takes three years to realize profits from a lower interest rate. You'll want to see how long it will take you to make back the money you are spending upfront and put that time firmly on the negative side.

If you are doing a cash out refinance and using the money for other things, and then you fail to make your monthly payments on time, you risk losing your home.

As you can see, most of these negatives can be fixed or avoided with some careful calculations on your part before making any decisions.

Will this experience save you money? Cost you money? One of the biggest deciding factors in the process is the numbers, so balance them out and see where you stand on your project then. The biggest pros and cons for refinancing can easily be seen when you take a look at your budget.

For more about the process and how all of this works check out How Does Refinancing Work?