Central Bank of St. Louis

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  • The pros and cons of refinancing

    To gain financial flexibility and potentially a lower interest rate, many people choose to refinance.

    Pros and cons of refinancing

    Before you decide this is the option for you, consider the following:

    PROS:

    Lower interest rate
    The opportunity to lower your interest rate, and more importantly your overall mortgage, is the most popular reason people choose to refinance. Money Crashers gives an example explaining the difference between a $250,000 30-year mortgage loan with a 6 percent interest rate vs. a 4 percent interest rate is nearly $300 less to pay per month [1].

    Fixed-rate mortgage
    Since fixed-rate mortgages will maintain the same rate for the life of the loan, they offer more stability for the future. An adjustable-rate mortgage changes based on the index, making you vulnerable to changes that may increase your payments. Adjustable-rate mortgages are best for homeowners who are only planning to stay in their houses for a short period of time. If you plan on sticking around, a fixed rate may be your best bet [1].

    Shorten the length of your loan
    During the first years of a 30 year loan, you are paying significantly more interest than principal. When the rates are low, you can possibly lower your monthly payment by refinancing while also reducing the length of your loan, which can save you thousands in interest [2].

    CONS:

    Understand associated fees
    Along with the benefits comes a cost. Before you decide that refinancing is the right option for you, determine how much you are going to pay in refinancing fees so you can figure out your break-even point. By determining how long it will take you to recoup the charges from the lender, you can better understand whether it is going to be worth it for you to refinance.

    Your current credit score
    Income and credit are the most important factors when it comes to whether you receive a lower rate or not [1].

    Lenders are cautious not to allow just anyone with a mortgage to be approved, especially after events like the housing market crash. Because of this, they will use your current credit against your credit from when you applied for your original mortgage. If it has dropped a significant amount or your income is lower due to a job change, there is a chance you may not be approved or will have to pay a higher rate.

    [1] Pros & Cons of Refinancing Your Home Mortgage Loan
    [2] 7 Pros and Cons to Refinancing Your Mortgage, The Fiscal Times



  • The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its affiliates and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.