The pros and cons of refinancing your home loan

By Maera Tezuka
A woman on the phone with her lender about refinancing


Home-buying can be an adventure, and there's no question that it can be tricky to find the right mortgage for you, and once you've found that loan and the lender approves you for it, owning a newly-bought home can give property owners and investors a much-needed sense of achievement. After a while, though, as monthly repayments begin to become a regularity in your monthly expenses, it's possible to think of looking at finding a better deal than what you currently have. If that's the case, you'll want to investigate refinancing.

Refinancing is a choice people take if they think their current mortgage keeps them from having financial freedom. Typically centered around finding a lower interest rate or lower repayments, the goal is always to live comfortably despite having to pay debt.

Here’s a list of some of the benefits homeowners are looking for when they consider refinancing:

Lower repayments

With a lower interest rate, your monthly repayments will decrease – a sensible way to lighten up the burden if you’re strapped in cash.

However, do take note that opting for lower repayments will usually mean a longer loan period. The longer it takes to finish paying up the debt, the higher the accumulated interest you'll pay.

That is, you'd better be ready to do some calculations before deciding to switch up your mortgage for one with lower monthly payments. Take into account how much you’re going to shell out for the interest in the long run and see if lower monthly repayments are worth your money. Sometimes, it’s much better to have a larger bill every month because it means being able to be free from debt sooner.

Lengthen (or shorten) your loan period

Refinancing can extend the life of your mortgage or cut it short – it depends on what suits your circumstance.

It doesn’t always mean looking for a reduced interest rate: It can also be used to make use of a much higher repayment rate (if you can afford it), so that you won’t have to be tied up to your loan for, let’s say, 30 years. It’s possible to cut it down to 15 years.

Save some money

This is the most common reason for borrowers to want to switch from one loan to another. They often want to save money by transferring to a mortgage that comes with a lower interest rate than their current loan.

There’s no denying that a few hundred dollars saved can be a great help to families who are looking to free up some cash.

Switch from variable rate to fixed rate (and vice versa)

If keeping tabs on the Federal Reserve, which oversees the monetary policy and subsequently sets the national interest rate, makes you anxious and stressed out, it might be a good idea to refinance by applying for a fixed interest rate.

You’ll be more relaxed because you’ll have a sense of security that your dues will always be the same whichever way the market goes.

That said, if you’re looking for some spontaneity and want to take advantage of the pared down interest that usually comes with a variable rate mortgage, you can also make the switch from fixed to variable.

Make use of your home equity

Home equity is the difference between the market value of your home and what’s still remaining to be paid on your home loan.

Let's say your property is worth $700,000 and you have a total of $300,000 remaining balance on your loan.

This means you own $400,000 of your property, which is also known as the equity.

This is the amount of money that you have access to should you choose to refinance. You can use it for other big ticket purchases and investments such as renovating your home, paying for your child’s tuition, taking a holiday vacation abroad, or simply use it as a security blanket for when you need money.

Streamline all your debt into one loan

Debt consolidation is another perk that borrowers can take advantage of when they refinance. Gathering all your high interest debts and bundling it into one single debt (in this case, your home loan) may reduce your monthly stress levels.

Homeowners should be wary of this option, however, because folding short term debts together is a move that can actually be a disadvantage, as you will usually prolong the length of your loan.

For consolidation to be truly effective, you need to catch up with the inflated loan by making additional repayments as quickly as possible. If you don't, you may wind up digging yourself into a financial pit.

So, while refinancing may sound like the right move for you, it can outsmart borrowers if they’re not careful by making them pay for more in the form of additional fees from transactions.

It’s best to weigh the advantage and disadvantages very carefully, because refinancing on a whim can potentially lead to the foreclosure of your home or repossession of your investments.