The Pros and Cons of Mortgage Refinancing

By Jessica Groach HIPhome Columnist December 31, 1969

It used to be that everyone had a 30-year fixed mortgage on their home, and the idea was to pay off their house. But these days, people see a house as an investment.

If you're like most people, you've seen your home's value greatly increase over the past few years. You might want to cash in on that equity. Remember, that's free money -- it's not taxable.

Loan Terms

By refinancing your mortgage at a lower interest rate, you could save money on your payments, and possibly have money left over.

An adjustable-rate mortgage (ARM) offers cash flow. An ARM offers a finite period of time, usually one to five years, during which the interest rate is fixed. That fixed interest rate is typically two percentage points lower than that of a 30-year fixed. That's money in your pocket. The downside? You risk higher rates later, or you might have to refinance again at the end of that fixed period. Refinancing may cost $3,000-$4,000.

The Cash

Whatever the new terms of your loan, you may still have money left over. What do you do with it? 1) You can "cash out," take that money in a lump sum, and pay debts, or make a major purchase like college tuition. Or you could put that money into an investment that grows, and have more money overall.
2) Take out a home equity line of credit (HELOC). This works like a credit card, where you draw money out as you need it. This is ideal for those doing home repair or improvement, because it's hard to know how much money you'll need for that home repair, or how long it will take.

Refinancing your mortgage may be a risk, but for many, the rewards are worth it.

About the Author
Jessica Groach, a new homeowner herself, is a freelance writer and writing instructor at the University of Nevada, Reno. Her work has appeared in various lifestyle and business publications, including a Warner Business Book, and she has seven years' experience in advertising and television production.


*Before you apply any of the advice described on the Hip-home.com website, you should consider if the advice is safe and suitable for your individual home situation and consult experts as necessary to evaluate the suitability for your circumstances.