Refinancing? Read the Pros and Cons

What is refinancing? How does it work? How come I don’t know about it?

Refinancing simply means taking a new loan to repay an existing loan. This is often done to secure better terms or to get a lower interest rate. A home equity loan creates a second mortgage on your home.

The first thing to do when considering refinancing is to find out the current mortgage rates. Are they higher or lower than what you are currently paying? If they are higher then you probably don't want to refinance unless you want to extend the term of your current mortgage. But if the rates are favorable then you have to make a decision.
How long do you plan to live in the house?
How close are you to paying it off?
Will your current salary change in the near future?
Do you need cash now?
Do want lower monthly payments?

If you need cash, look into a home equity loan. You can get more cash by refinancing but you will also have to pay fees for the refinance itself. These fees can sometimes be rolled into the new mortgage but that increases the mortgage.

A Home Equity Loan may put cash in your pocket but you will be taking out a 2nd loan on your home. If you default you will lose your home. As a homeowner you must be very careful about which refinancing option you take. Most mortgage brokers will explain each scenario but do yourself a favor and investigate your own situation.

If your aim is to pay off your house, refinancing may allow you to shorten the term of the loan while getting a lower interest rate. But it takes a good credit score to accomplish this. That's why you should think about how close you are to paying off your house.

Think about what your salaries are going to be in the near future and what financial position you would like to be in. If you need bad credit refinancing the worst thing you can to do is to overextend yourself and make hard financial times even worse.

You may end up paying a lower interest rate, shorten your mortgage term and increase your payments all in one swoop, but just because you can afford to do that now does not mean you will be able to afford it in the future.