Pros & Cons of Refinancing Your Mortgage

Refinancing your mortgage can be a strategic financial move, but like any decision, it comes with its own set of advantages and disadvantages. If you’re a homeowner considering refinancing, it’s important to understand both the benefits and potential drawbacks before making a commitment. California Community Credit Union (CACCU) is here to guide you through the pros and cons of refinancing your mortgage so you can make the most informed decision for your financial situation.

What Is Mortgage Refinancing?

Refinancing your mortgage involves replacing your existing loan with a new one, typically to secure a lower interest rate, change the loan term, or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (or vice versa). The new mortgage pays off the old one, and you begin making payments on the new loan under the new terms.

The Pros of Refinancing

1. Lower Interest Rates

One of the most common reasons homeowners refinance is to take advantage of lower interest rates. A lower rate can significantly reduce your monthly payment, helping you save on interest over the life of the loan. For example, reducing your rate by just 1% could potentially save thousands of dollars over time.

2. Shorten or Extend Loan Term

If your financial situation has improved and you want to pay off your mortgage faster, refinancing to a shorter loan term (like moving from a 30-year loan to a 15-year loan) can help you save on interest. Alternatively, extending your loan term can lower your monthly payments, which might provide breathing room if you’re managing other financial obligations.

3. Switch Loan Types

Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage can provide more stability in your payments, especially if interest rates are expected to rise. On the other hand, refinancing to an ARM may make sense if rates are falling, and you plan to sell or pay off the loan before the adjustable period kicks in.

4. Access to Home Equity

If you’ve built up equity in your home, refinancing could allow you to access that equity through a cash-out refinance. You can use the funds for home improvements, debt consolidation, education, or other major expenses. This can be a more cost-effective way to borrow money than taking out a personal loan or using credit cards.

5. Eliminate Private Mortgage Insurance (PMI)

If your home has appreciated and you now have more than 20% equity in your property, refinancing can allow you to eliminate PMI from your monthly payments, which can save you hundreds of dollars each month.

The Cons of Refinancing

1. Closing Costs and Fees

Refinancing isn’t free. Just like your original mortgage, there are closing costs involved, which typically range from 2% to 5% of the loan amount. These costs can include origination fees, appraisal fees, title insurance, and more. If you’re not planning to stay in your home long enough to break even on these costs, refinancing may not be worth it.

2. Extending Your Loan Term

While refinancing to a longer-term loan can lower your monthly payments, it can also increase the total amount you pay in interest over the life of the loan. For example, if you refinance into another 30-year mortgage after having paid on your current mortgage for 10 years, you’ll be making payments for an additional decade.

3. Risk of Over-Borrowing

Cash-out refinancing can be tempting, especially if home values have risen and you want to tap into that equity. However, taking out too much equity from your home can leave you vulnerable if property values decline or if you’re unable to keep up with your new mortgage payments. It’s important to borrow responsibly and avoid over-leveraging your home.

4. Impact on Your Credit Score

When you apply for a refinance, the lender will perform a hard inquiry on your credit report, which can temporarily lower your credit score. Additionally, closing an old mortgage account and opening a new one can affect the length of your credit history, which is another factor in your credit score.

5. Possible Reset of Your Loan Clock

Refinancing resets the clock on your mortgage. If you’ve already been paying on your loan for several years, refinancing into another long-term mortgage might extend the time it takes to fully own your home. For example, if you’re 10 years into a 30-year mortgage and refinance to a new 30-year loan, you’re back to square one with 30 years to pay off your loan.

Is Refinancing Right for You?

Before refinancing, it’s essential to assess your current financial situation and long-term goals. Ask yourself these questions:

• How long do I plan to stay in my home? If you plan to move in a few years, refinancing might not be worth the upfront costs.
• Can I afford the closing costs? Calculate how long it will take to break even on those costs and whether it makes sense for your budget.
• What are my financial goals? Do you want to lower your payments, pay off your mortgage faster, or access your home equity? Your goals will dictate the best type of refinance for you.

Conclusion

Refinancing your mortgage can be a smart financial move, but it’s not a one-size-fits-all solution. While it offers the potential for lower payments, shorter loan terms, or access to equity, the costs and risks should also be carefully considered. At California Community Credit Union, we’re here to help you weigh the pros and cons and decide if refinancing is right for you.

For more personalized advice or to explore our mortgage refinancing options, feel free to contact our team at California Community Credit Union at (800) 332-1418. We’ll help you find a solution that aligns with your financial needs and goals.