Refinancing your mortgage may not be the best decision for you, so consider the reasons not to refinance your home.
A homeowner with financial woes could find themselves considering refinancing their mortgage. This means you would take out another mortgage loan, pay off the old one and proceed with the new one. You would only do this if the new loan saved you money over time and/or had better terms.
This would allow you to bank the money you’re saving or use it on other necessities. Refinancing isn’t something you decide on a whim, though, so it’s important to examine the reasons to refinance your home and the reasons not to refinance your home.
Reason #1: You Won’t Be in Your Home for Long
According to Greg Clement, founder and CEO at Realeflow, the rule of thumb is you don’t want to refinance if you likely can’t hold the new loan past its break-even point. Let’s say it’ll take you five years to recoup the refinance closing costs, but if you're planning on selling and moving before that, then it’s probably not a smart move.
Refinancing is different from person to person, though, so even if you are moving, it could still be the right thing to do if you’re really struggling financially. “If you're moving soon, the total interest might not matter as much. If you absolutely need a lower payment right now because your current one is too much, then refinancing might be the right move, even if you end up paying more interest overall,” says Joe DiSanto, founder and CEO at Play Louder.
Reason #2: You Aren’t Saving Money in the Long Run
If your original loan is a 30-year mortgage, refinancing into a new 30-year mortgage means you’re resetting the clock. So, if you were 10 years into your original loan, you have to start over with 30 years on the new contract, meaning you’ll be paying interest for longer.
“You might enjoy a lower payment now but end up paying more total interest over the life of the loan,” says Clement. “If refinancing significantly lengthens your payoff timeline without a plan to mitigate that (like extra payments), it may not be wise.”
Reason #3: You Won’t Secure a Better Rate
The idea is that refinancing will lead you to a better interest rate and/or lower monthly payments. However, that’s not the case for everyone. Look at your current credit score. Is it lower than when you got your original mortgage loan? Or is your debt-to-income (DTI) ratio higher? If yes, then you might not get a lower rate and would be better off sticking with what you have.
“It's worth it when you've done the math and you know you're coming out ahead financially in the long run,” says DiSanto. “Don't just look at the lower payment. Figure out how much total interest you'll pay on your current loan versus the new loan. You have to compare the amortization of both loans to see if you're really doing better.”
Reason #4: You Can’t Afford Closing Costs
Unsurprisingly, refinancing isn’t free. Closing costs will probably cost a few thousand dollars, and it’s best to be able to pay them instead of rolling them into the new loan. “Adding the costs to your mortgage balance reduces your equity and increases the amount on which you pay interest. If closing costs are very high relative to your potential savings – say, due to an expensive appraisal or points you’d have to pay – refinancing might not be worth it,” says Clement.
Reason #5: You Want to Consolidate Debt (in a Risky Way)
Consolidating debt is actually one reason that you might want to refinance your home. However, if done in a risky way, it’s one of the reasons you don’t want to do it. A cash-out refinance lets you refinance your mortgage for a higher amount than what you owe, allowing you to access your home’s equity. You can use that money to pay off debts, which would eliminate those monthly payments and increase cash flow. That all sounds good, right?
“Refinancing to consolidate high-interest debt (like credit cards) into a lower-interest mortgage sounds smart – and it can be, but it comes with risks,” says Clement. “You’re turning unsecured debt into debt secured by your home. If you run up the credit cards again or can’t pay the mortgage, you could jeopardize your house.”
The Bottom Line
Deciding whether or not to refinance your home forces you to take a serious, honest look at your finances. As helpful as refinancing can be, it carries risks, making it not ideal for everyone. The best thing you can do is focus on your financial situation and ensure it’s worth it for you in the long run. Also, be sure that any potential risks won’t be a problem. If you decide to move forward, remember you’ve gotten out of one mortgage contract, but you still have another you need to take seriously.
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Caitlyn Fitzpatrick, the author of this piece, has been an editor and writer since 2014. With expertise in commerce journalism, she strives to help readers make smart buying decisions, whether purchasing a product or making a major life financial judgment. To provide real-world insight on why someone may not want to refinance their home, we spoke with Greg Clement, founder and CEO at Realeflow, a real estate investing software company, and Joe DiSanto, founder and CEO at Play Louder, an educational platform for financial strategy coaching.
FAQ
What do you lose when you refinance your home?
“In a properly executed refinance, homeowners shouldn’t ‘lose’ anything substantial – you’re restructuring debt, not selling the house,” says Clement. However, you will lose the money you paid in closing costs on the original loan. You may also see a credit score dip, but it should hopefully be brief. “Perhaps the biggest ‘loss’ is time. If you restart a 30-year term after paying X years into the original loan, you lose the progress in the sense of time remaining,” says Clement. “You might have been 10 years closer to owning the home free and clear. After refinancing, you’re back to a longer timeline (unless you chose a shorter-term loan).”
Does refinancing hurt your credit?
The bad news is, yes, it can impact your credit score. But the good news is that it’s typically a small, temporary impact. Lenders must pull your credit report, resulting in a hard inquiry. Another thing to consider is that closing your original mortgage could shorten the average age of your accounts. However, your payment history from that original mortgage will stay on your credit report (for up to 10 years) even after you close it, Clement explains. So, you won’t lose that (hopefully) positive payment history.
How much are the closing costs for refinancing?
“Refinancing a mortgage incurs many of the same closing costs as your original mortgage did,” says Clement. “In total, refinancing costs typically run about 2% to 5% of the loan amount.”
You can expect to pay a loan origination/application fee, appraisal fee, title search and title insurance fee, recording fee and taxes, attorney or closing agent fee, prepaid interest and escrows and (if you choose) points.
Sources
- Greg Clement, founder and CEO at Realeflow, a real estate investing software company
- Joe DiSanto, founder and CEO at Play Louder, an educational platform for financial strategy coaching
About Caitlyn Fitzpatrick
Caitlyn Fitzpatrick has been a professional writer and editor since 2014 and entered the commerce journalism world in 2017. She’s passionate about helping readers make smart buying decisions by using data insights and interviewing experts. Most recently, Fitzpatrick was the Senior Shopping Editor at Trusted Media Brands, where she led affiliate content on Reader’s Digest. In addition to Benzinga, Fitzpatrick’s work can be found in a range of publications, including U.S. News & World Report’s 360 Reviews, Today’s Parent, Betches, WhatToWatch.com, PS (formerly Popsugar), and more.