Should I Refinance my Mortgage? Pros and Cons of Refinancing Your Home (2024)

FAQs

What are the negatives to refinancing a home? ›

Is refinancing worth it? If it frees up money in your monthly budget, reduces the overall cost of the loan or helps you achieve some other financial goal, refinancing can be well worth the work and money. “It's important to determine your break-even point,” says Linda Bell, senior writer for Bankrate.

Key Takeaways

Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.

Refinancing too often or leveraging too much home equity

Avoid making the mistake of refinancing excessively to land a low interest rate. The charges to refinance repeatedly could add up over time, negating the benefits. Be wary of also leveraging home equity too often.

As such, refinancing might not be worth it if: You've been paying your original loan for quite some time. Refinancing results in higher overall interest costs. Your credit score is too loan to qualify for a lower rate.

You can choose between two different options with a no-closing-cost refinance: either an increased interest percentage or a higher loan balance. Not every lender offers both types of no-closing-cost refinances, so make sure your lender can offer you the option you want.

Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.

The cost to refinance a mortgage ranges from 2% to 6% of your loan amount, and you can expect to pay less to close on a refinance than on a comparable purchase loan. The exact amount you'll have to pay depends on several factors, including: Your loan size. Your lender.

If you're refinancing to get a better rate

If you're eager to refinance to get a better rate, you may want to wait. Mortgage rates are expected to continue dropping into 2024, according to Fannie Mae, hitting an average of 6.8% by the fourth quarter and even more in 2025.

Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender.

What is the main reason people refinance a home mortgage? ›

To get a better rate if rates are lower than when they purchased their home. To change the term of their loan. For example, if someone has a 30-year mortgage and they want to pay it off quicker, they might refinance into a 15-year loan.

Refinancing your mortgage does not have to negatively impact your home equity. Just the opposite, in fact: The goal of a refi generally is to get a new loan with lower interest rates, making repayments easier and allowing you to build equity faster.

Thanks to declining interest rates, many homeowners can refinance and save hundreds of dollars on their monthly payments. But even if you're only saving $50 or $100 a month, it might make sense to refinance despite a distant breakeven point.

Owner-Occupancy Requirements

The lender gets to decide if this clause is thrown into your refinance. But it's common among FHA loan refinancing solutions. If there is an owner-occupancy requirement, you'll likely be expected to live in the home for at least a year before selling it.

In Fannie Mae's latest rate forecast, the government-sponsored enterprise said it expects 30-year fixed rates to end 2024 at 6.4%. Even though national average rates have gone up over the past few weeks, Fannie Mae's forecast for Q4 2024 hasn't changed.

Once you refinance, it's like you're starting over. Say you've been paying off your old mortgage for 10 years, and you have 20 years to go. If you refinance into a new 30-year mortgage, you're now starting at 30 years again.

Securing a lower interest rate through a refinance reduces your cost of borrowing so you'll pay less on your personal loan overall. Refinancing to a longer loan term offers lower minimum monthly payments. You will likely pay more toward the loan overall by extending the repayment timeline due to interest charges.