Mortgage Refinancing: Pros and Cons

Refinancing a mortgage can offer you many advantages; you'll be able to utilize various tax breaks and save money in the form of interest. However, the process is not without its disadvantages. This article discusses the pros and cons of refinancing a home mortgage.

One of the biggest advantages of refinancing a mortgage is the tax breaks you will likely be eligible for. The interest you pay on your mortgage is tax-deductible, which will save you on your end-of-the-year taxes. Many opt to refinance their mortgage in order to finance a purchase and make it tax-deductible; for instance, people refinance their home in order to pay for a car, deducting on the interest.

Another one of the benefits of refinancing your mortgage is the money you will save on interest. If you got your mortgage when interest was higher, you will pay a lot more throughout the loan term. By refinancing, you will slash your interest rate and therefore your monthly payment.

When you refinance your mortgage, you can choose a traditional or a jumbo mortgage. The jumbo mortgage will come with a high interest rate, because they represent a bigger risk for the lender. If you can offer a larger down payment, you can refinance your mortgage into a conventional loan and save a lot more.

The biggest drawback of refinancing a mortgage is the closing costs you will likely have to pay. A lot of mortgages require that you pay the closing costs, which are quite substantial, and can eat away or even eliminate the savings that come with the refinance. Before you sign, make sure that the closing costs are reasonable.

Another disadvantage is the temptation to use the money from a mortgage refinance to make luxury purchases. If you do this often enough, you will lose all the equity in your home and you won't be able to recover it, and you will end up paying a lot more than you should.