Choosing to refinance your mortgage is an important financial decision, and it’s one that can have a significant impact on your financial future. To put it simply, this means replacing your existing mortgage with a new one. This new loan pays off your old mortgage and replaces it with a new one with different terms, rates, and payments. Before taking the plunge, it's important to weigh the pros and cons of making the leap to refinance your mortgage. Keep reading to learn what they are, and be sure to use the mortgage calculator offered by iSelect to ensure you get the best deal and qualify.
Pro: Lower Monthly Payment
Refinancing your mortgage is a great way to save money and lower your monthly payments. For many homeowners, the monthly payments on their mortgages can be a significant portion of their monthly budget, so reducing the payments can be a great way to free up more money for other expenses. Choosing to refinance can also help you pay off your mortgage faster, build equity more quickly, and even help save money in the long run. When you refinance your mortgage, you are essentially taking out a new home loan to replace your existing one. This new loan pays off the original loan, so you no longer owe the old lender. This process can help you to reduce your monthly payments, since you may be able to get a lower interest rate or a longer loan term.
Con: Prepayment Penalties
If you’re choosing to refinance your mortgage, it’s important to understand that some lenders may charge a prepayment penalty if you refinance before the end of the loan term. This means that if you refinance to a lower interest rate or a shorter term than what you have now, you may be charged a fee for the privilege. The purpose of a prepayment penalty is to protect the lender’s profits. When you refinance your mortgage, the lender will lose out on the interest you would have paid had you stayed with your current loan term. To make up for this loss, some lenders will impose a fee that is often equal to a percentage of the loan balance.
Pro: Access to Equity
Refinancing your mortgage is one of the best ways to ensure access to equity, and it’s an option that many homeowners should consider. Equity is the difference between the current market value of your home and the amount you still owe on your mortgage. It is a key factor in the financial stability of any homeowner. Choosing to refinance your mortgage can provide you with the equity you need to make necessary repairs or upgrades to your home, make a large purchase, or even pay off other debts. It can also help you reduce your monthly mortgage payment and potentially save you money in the long run. Choosing to refinance your mortgage can be a great way to access the equity you have built up in your home.
Con: A Deduction to Your Credit Score
When you choose to refinance your mortgage loan, the credit bureaus receive notification that you are taking out a new loan, which may cause your credit score to drop temporarily. The first thing to understand is why choosing to refinance may cause your credit score to drop. When you take out a new loan, the lender will usually run a hard inquiry on your credit report, which can temporarily lower your credit score by a few points. This is because hard inquiries stay on your credit report for up to two years and can be seen by other lenders, which can make it look like you’re trying to take on more debt than you can handle. However, the good news is that these hard inquiries are only a minor factor in your credit score and typically won’t have a major impact. In fact, in most cases, your credit score will bounce back within a few months.
Overall, refinancing your mortgage can be a great way to lower your monthly payments, get cash out of your home, and possibly shorten the length of your loan. However, it can also be a complicated and costly process, and it is important to understand the pros and cons before making a decision.
