Obtaining, choosing, and understanding a mortgage can be one of the most complicated and overwhelming aspects of becoming a first-time buyer and homeowner. Often, many people simply go with the first mortgage approval that they receive, but later find out that it wasn’t their best option.

That’s where refinancing a mortgage can come into play. There are many different reasons why a homeowner may consider refinancing at some point during their mortgage, but like the first time, you should ensure that it really is the best option for you before going ahead.

In this post, we’ll explore some of the reasons for refinancing a mortgage, and what the benefits and risks can be when considering it as an option.

What is Mortgage Refinancing?

Refinancing a mortgage is when a homeowner exits their previous mortgage to obtain a new one. Any equity that was paid into the first mortgage is either paid out fully or partially in cash, or put towards the new mortgage.

Why Refinance a Mortgage?

Refinancing a mortgage can be a good choice if it’s done correctly. Some of the most common reasons for refinancing a mortgage include:

Better interest rates. If your first mortgage had a high interest rate due to a lack of credit experience on your part, or the real estate market, refinancing your mortgage when rates are lower could save you a significant amount of money. Some people also use mortgage refinancing as a way to switch between fixed and adjustable rates.

To consolidate debt. Say you have a mortgage, a car, and student loans or credit card debt. If your interest rates are higher on your vehicle or personal loans, consolidating your debt under your mortgage can save you interest money and also make payments much more simple.

To shorten a loan term. With better rates, and possibly more established salaries, you may be able to refinance your mortgage in order to shorten your loan term. That means taking the total length of your mortgage down by a few years so that you are free of house payments earlier.

To reinvest in the property. Sometimes, homeowners refinance in order to renovate or to conduct large repairs on the property. This can add value to the home’s worth, increasing its selling opportunities in the future.

Why Not Refinance a Mortgage?

While refinancing is a clear positive for some, it is often used in the wrong ways, leading to big financial issues for homeowners down the road. Many people refinance for the following reasons, without considering the consequences.

For another big purchase. Whether it’s your child’s tuition, or a new vehicle, refinancing your home just to make another big purchase isn’t a great idea. Losing equity in your home just increases the length of your mortgage, taking away from your hard work. Instead of taking money out of your mortgage, consider either waiting until you can afford the purchase, or exploring other loan options if you can afford them.

To start a business. Successful startups can produce extremely profitable results. Unsuccessful ones can create significant debt and even bankruptcy. Taking equity out of your home to fund anything less than a certain venture can put you on treacherous financial path. Instead, look into grants, investors, small business loans, or other funding options.

If you are selling soon. If you plan to sell your home in the near future, refinancing is virtually pointless. Since you will probably have to pay closing costs on the new mortgage, it is unlikely that you would benefit from any savings on a lower interest rate, and the term of your mortgage wouldn’t matter.

Should I Refinance my Mortgage?

The first thing to ask yourself when considering a mortgage refinance is what your goal or purpose is. Is it a strategic move to benefit you in the long run, or is it a short-term solution to a bigger problem?

If you are refinancing in order to reap long-term rewards, there are still a few things that you need to consider.

First, you will need to have good credit and a solid employment history. It’s almost like applying for a mortgage all over again, so in order to benefit from a better rate your financial life will need to be nice and tidy.

Secondly, you need to calculate whether or not your new offer is actually a better choice. Remortgaging often comes with closing costs—fees for filing paperwork, transferring your mortgage, a credit report, and many others. If the closing costs are more than what you are calculated to save, then remortgaging probably isn’t a great option.

Prior to any contractual agreements, lenders can provide you with an estimate of your closing costs. You can use one of many online refinancing calculators to find out whether or not your refinancing options look good on the surface, but it’s still a good idea to talk to a financial advisor about how it will affect the rest of your personal finances.

Weighing the Pros and Cons

Mortgages can be arduous the first time around, let alone the second. Refinancing is a serious financial decision that can lead to both positive and negative consequences for uneducated homeowners. Before making a decision to refinance, make sure that it has clear benefits for your financial future.

Refinancing a home should make sense to both you and your bank account, so weigh your options carefully and be sure to ask for clarification when you need it.

What are other reasons for refinancing? What are other pros and cons?

Posted by Brittany Foster

Brittany is a writer, editor, and content manager interested in law, marketing, and technology. She's been writing for LawDepot since 2014.