Pros and Cons of Refinancing Your Mortgage


When mortgage rates hit record lows, many homeowners consider a mortgage refinance. Refinancing involves applying for a new mortgage to pay off your current mortgage. The new mortgage typically offers a better rate and terms, resulting in substantial savings. But just because you’re able to refinance doesn’t mean you should. Refinancing makes sense in some cases, but it’s not the right choice for everyone.

Make sure you understand the advantages and disadvantages of refinancing, and then decide whether it’s the right time to apply for a new home loan.

Pros of a Mortgage Refinance

  1. Lower interest rate

If you have a fixed-rate mortgage loan, refinancing is the only way to take advantage of a lower mortgage rate. A lower rate can reduce your monthly payment and save thousands over the life of the loan.

  1. Convert an adjustable-rate mortgage to a fixed-rate

Refinancing allows you to switch from an adjustable-rate mortgage (ARM) to a fixed-rate.   The interest rate with an adjustable-rate mortgage varies over time, which causes monthly payments to increase or decrease. The interest rate with a fixed-rate mortgage remains the same over the life of the loan, resulting in predictable, stable payments.

  1. Cash out your equity

Selling your home is one way to tap your equity. If you don’t want to move, you can apply for a cash-out refinance and borrow up to a percentage of your home’s equity. You can use the money for a variety of purposes, such as home improvements, debt consolidation, business expenses, etc.

  1. Remove name off the mortgage

Removing an ex-spouse or a cosigner from a mortgage isn’t as simple as calling the mortgage lender and making a request. If getting a divorce or breaking up with a partner, you can transfer ownership of the house to this person and vice versa, but this act doesn’t remove a name from a joint mortgage. To accomplish this, you have to refinance the mortgage. You (or your ex) would have to apply for a new mortgage in your name only, and be able to qualify without the other person’s income or credit.

Cons of a Mortgage Refinance

  1. You have to re-qualify

The fact that you already have a mortgage doesn’t guarantee an approval when applying for a refinance. This is an entirely new mortgage and you have to complete the same process as acquiring the original mortgage. This includes filling out a mortgage application, authorizing a credit check and providing income documentation. Unfortunately, if your credit score has decreased since applying for the original mortgage, or if you’re earning less money, these changes can affect qualifying.

  1. You have to pay closing costs

Refinancing can result in a cheaper mortgage rate and lower payments, but it’ll cost you. Just like the original mortgage, you have to pay closing costs (loan origination fees, appraisal, credit fee, title search, etc.). Upfront fees can cost as much as 2% to 5% of the loan balance. Some lenders offer provisions to help borrowers cover the closing costs, such as including these fees in the mortgage balance, or paying a borrower’s closing costs and then charging a higher mortgage rate.