When the word refinancing is used, people often think it is a great way to save money. Though refinancing one’s mortgage is a good choice for some, it can be a costly decision for others. Before a decision is made about mortgage refinancing a homeowner should weigh out the pros and cons.

First, let’s take a look at what it means to refinance a mortgage. When a person refinances their mortgage, they pay off an existing loan with a new one.

People choose to refinance their mortgage for a host of reasons. One of the main benefits of refinancing a mortgage is to lower the interest rate. Many lenders have stated that an interest rate that saves the home owner 1% off of their original loan is enough to consider refinancing.

A lowered interest rate can help a home owner to save money. They are able to save money possibly in two ways. The lowered interest rate can also result in lower monthly payments. For example, a 30 year loan on a home costing $115,000 at a 7% interest rate will yield a monthly payment of $765.10. The same loan with a 5% interest will yield a lower payment of $617.34 per month (this figure does not include taxes or insurances cost.

The second way a refinanced home loan can save homeowner money is by possibly shortening their loan term. With a 4% decrease in their interest rate the homeowner with a 30 year loan is able to reduce their loan term by about half. By refinancing a 30 year loan of $115,000 at 7% to 3 percent, the loan term will decrease to 15 years. The payment will increase slightly. The payments will change from $765.10 per month to $794.17. Though there is a slight increase in the monthly payments, the homeowner will be able to pay off their mortgage in half the time.

If the benefits of refinancing a mortgage are to save money, then what are the reasons that would deter a person from going forward with a new loan?

Refinancing a mortgage is able to save homeowner money in time. If a person wants to sell their home within the next few years, refinancing may not be for them. Because refinancing involves taking out a new loan, the cost of title searches, appraisals, and application fees are to be paid by the home owner. There is also a 3% to 6 % charge of the loan’s principal that is also due. The cost of the refinance could take years to recoup from the extra monies saved by the refinanced loan. This will mean that a person wanting to sell their home within a couple of years would have paid more money to refinance their home, compared to keeping the existing mortgage.

Refinancing is a great option for some homeowners, but for others it can become a financial headache. Because of this a homeowner should view all the pros and cons of refinancing before decided to proceed.