Even when mortgage rates are low and friends and colleagues are bragging about who got the greatest deal, refinancing isn’t always the wisest option.
This is because refinancing a mortgage can take a long time, be costly at closing, and require the lender to pull your credit score.
Consider why you’re refinancing before starting the tedious task of obtaining pay stubs and bank documents.
While a refinance can help you achieve some financial goals, such as easing monthly cash flow, dealing with a financial emergency, or paying off your mortgage faster, there are seven reasons not to refinance your mortgage.
Important Points to Remember
Depending on your motivation and goals, as well as the financial parameters of the refi, refinancing your mortgage can be a good or poor decision.
Many people who refinance debt to consolidate it end up with additional credit card balances that are difficult to pay off.
Due to fees and closing expenses, a longer loan term, or a higher interest rate related to a “no-cost” mortgage, homeowners who refinance may end up paying more over time.
1. Consolidation of Debts
Consolidating debt can be beneficial, but it must be done correctly.
In fact, if debt consolidation is done incorrectly, it might be one of the riskiest financial decisions a homeowner can make.
Paying off high-interest debt with a low-interest mortgage appears to be a good idea on the surface, but there are some drawbacks.
To begin with, you’re converting unsecured debt (such as credit card debt) into debt secured by your house.
You may lose your home if you are unable to make your mortgage payments.
While not paying credit card debt can hurt your credit score, it’s usually not as bad as going into foreclosure.
Second, many customers find that after they pay off their credit card debt, they are tempted to spend again, adding new debts that they will have a hard time paying off.
2. Applying for a Longer-Term Loan
While refinancing into a lower-interest mortgage will save you money each month, make sure to consider the total cost of the loan.
For example, if you have 10 years left on your existing loan and decide to refinance into a new 30-year loan, you will wind up paying more in interest overall and be stuck with 20 years of extra mortgage payments.
3. To save money for a new house
As a homeowner, you’ll need to do some math to figure out how much a refinance will cost and how much money you’ll save each month.
If it takes three years to recuperate the costs of a refinance, and you plan to move in two years, you will not save any money, despite the lower monthly payments.
Using a mortgage calculator to see what an alternative monthly payment would look like is a valuable resource.
4. To change from an adjustable-rate to a fixed-rate loan,
This can be a smart choice for some homeowners, especially if they plan to stay in the house for a long time.
However, homeowners who are just concerned about an adjustable-rate mortgage’s (ARM) negative reputation should carefully review its terms before refinancing.
If you have an ARM, be sure you understand the index to which it is linked, how often the loan adjusts, and what the first, annual, and lifetime loan adjustment caps are.
It’s possible that a fixed-rate loan is better for you, but do your homework before committing to a refinance.
5. Withdrawing Funds for Investing
Even if the stock market isn’t shaky, this isn’t a good idea in general.
Cash has the disadvantage of being too easy to spend.
This can be a smart alternative if you are diligent and will utilize the excess money to invest—or to grow your emergency reserve.
Paying off a mortgage at 4% per year may be a better value than putting your money in a CD that earns 2% per year.
Before you jeopardize your home’s equity, make sure you’re a competent investor who understands both the risks and the possible rewards.
6. To Reduce Your Monthly Payments
In general, it makes financial sense to cut your monthly payments by lowering your interest rate.
However, don’t overlook the fees for refinancing.
You will be making extra mortgage payments if you extend your loan terms, in addition to the closing expenses and fees, which can vary from 2% to 3% of your house loan.
If you have been paying on a 30-year mortgage for seven years and then refinance into a new 30-year loan, keep in mind that you will be paying on the old loan for an additional seven years.
Even though the refinance may still be profitable, you should think about the costs before making a decision.
When you compare the amortization schedules of your current and new mortgages, you can see how much of an impact a refinance will have on your net worth.
7. To Take Advantage of a No-Cost Refinance
There is no such thing as a “no-cost” mortgage loan, so be wary if you see one advertised.
When refinancing, there are numerous options for paying closing expenses and fees, but the fees are always paid in some form.
In other words, homeowners can pay for a refinance with cash from their bank account, or they can roll the charges into their loan and increase their principle.
Another option is for the lender to cover the costs by charging a little higher interest rate or incorporating closing points into the loan.
You can figure out the best way to pay for the expenses by comparing the monthly payments and loan conditions for each situation before deciding on the loan that best suits your needs.
What Is the Maximum Number of Times You Can Refinance Your Home?
While there are no laws limiting how many times you can refinance your house, lenders usually impose their own limits.
Prepayment penalties are also imposed by some lenders on current debts.
Your capacity to refinance is also influenced by the amount of equity in your property as well as your credit score.
Your lender may refuse to approve you if your credit score is lower than it was the last time you refinanced.
Closing costs and fees can take years to get back from refinancing, and lenders will check your credit, which can hurt your credit score if you do it too often.
Refinancing a mortgage can be a wise financial decision for many homeowners, especially if they require more than mortgage relief can provide, but not every refinance is a good idea.
Before making a decision, make sure to weigh all of your possibilities.