When Not to Refinance Your Mortgage
Refinancing your mortgage can potentially get you a lower interest rate, lower your monthly payments and possibly even shorten the term of your loan. But what are the reasons not to refinance your home and when is refinancing a bad idea? It’s important to know when and when not to refinance your mortgage as well as how to find the best refinance lender for your situation to figure out if refinancing is the right financial move for you.
Refinancing Your Home
Refinancing your home means taking out a new mortgage to replace your existing one. You may want to do this for a few different reasons. When interest rates go down, you may be able to get a new loan with a better interest rate, which will in turn lower your monthly mortgage payments.
You can also take advantage of low interest rates by refinancing with a loan that has a shorter term. This will help you pay off your mortgage faster while keeping your monthly payments affordable.
Another common reason to refinance is to get equity out of your home. The money you pull out can be used to pay off high-interest debt, make home repairs and upgrades or pay for other big expenses.
Should You Refinance?
“A mortgage refinance makes sense when it will save the homeowner money. It may also be the best option when the owner must raise funds and all other options are either exhausted or more expensive,” says Michael Drake, president of PMG Home Loans.
If refinancing while interest rates are low will help you meet your financial goals then you should consider it. Refinancing at the right time will lower your monthly mortgage payments, allowing you to put more money toward retirement and savings. Taking out a new loan could also shave years off your mortgage and ensure that you enter retirement with less debt.
Cashing out some of the equity in your home may also be a good financial decision depending on your circumstances. If you have high-interest credit card debt, for example, taking out a bigger loan to pay it off will save you money on interest and get you out of the debt cycle.
“A home is considered an appreciating asset and the funds should be used for equally wise investments,” Drake said.
Reasons Not to Refinance Your Mortgage
Taking out a new home loan can definitely help you meet your financial goals. However, there are a few good reasons why you may not want to refinance your mortgage.
If you plan on selling your home soon, refinancing could actually cost you money. It typically takes a few years to recover the money spent on closing costs, so don’t refinance unless you’re sure you want to stay in your home for at least a few more years.
Another reason not to refinance is poor credit. You won’t be able to qualify for a loan with a good interest rate if you have below-average credit, so you should work on raising it before you try to refinance.
If you can’t afford to pay the closing costs associated with refinancing, then you may also want to hold off. While some lenders do offer refinancing options with no closing costs, they come with higher interest rates that will eat into your savings. It’s usually worth it to wait and save up the cash you need to pay for closing costs out of pocket.
Another reason to delay refinancing is if you don’t have enough equity in your home. Homeowners who have less than 20% equity usually have trouble qualifying for conventional loans because they’re seen as higher-risk. Some government programs allow you to refinance with low equity, but it’s usually better to wait.
You should also steer away from refinancing if you’re already deep into your mortgage. If you’re 10 years into paying off a 30 year loan, for example, getting a new 30 year mortgage may not make financial sense. By doing so, you’ll be adding another ten years of payments to your mortgage, which could outweigh any savings you get from refinancing.
When Should You Consider Refinancing?
If you plan on staying in your home and interest rates have dropped, you may want to consider refinancing. As a general rule, refinancing will save you money if you can get an interest rate that’s 1% to 2% below your current rate.
When you take out a new home loan, you’ll have to pay closing costs, which typically equal 3% to 6% of the total loan amount. However, if interest rates are low enough, the savings you’ll get over the life of the loan will far outweigh the costs. Before you take out the loan, though, make sure that you crunch the numbers or use a refinance calculator to ensure that the savings will be worth it.
Sometimes refinancing is worthwhile even if interest rates haven’t dropped much. If you have an adjustable-rate mortgage and you’re worried about interest rates rising, you may want to switch to a fixed-rate mortgage to lock in a predictable interest rate. Just make sure that you shop around to get the best mortgage rate possible.
Choosing the Best Refinance Option
Having all of the necessary information is a key component of selecting the best refinance option. “Whenever a buyer or homeowner is considering a mortgage loan or refinance, they should ask the lenders for a Good Faith Estimate (GFE). This document will show a borrower the interest rate and all associated closing costs,” Drake said. “This is the best way to do a comprehensive comparison of the options before them.”
“If a borrower focuses on interest rates or closing costs exclusively, they may not be able to determine which lender is truly giving them the best deal,” Drake said.
You should also take the reputation of each lender into account and consider any perks that they offer, such as round-the-clock customer service or rewards points.
Bank of America may be a good lender to consider because it provides competitive rates and top-notch customer service. The bank has a Home Loan Navigator portal that allows you to upload documents, download important paperwork, e-sign documents and track the progress of your loan. You’ll also get help navigating the refinancing process from one of the bank’s experienced loan officers.
Right now, Bank of America is offering low refinance rates well under 4%. You can apply online, in person or over the phone, and you may even get same day preapproval. However, you won’t know which company will offer you the best deal until you get a few quotes.
The Bottom Line
Refinancing your home can be a good fiscal decision, but you need to do it at the right time and for the right reasons. If you plan on moving in the near future or you have below-average credit, you should probably hold off. Otherwise, take your time to find the right lender and understand the terms of your new loan. No cost refinancing options may sound attractive but they often come with higher interest rates that eat into your savings. Make sure you do the math and read the fine print to ensure it will save you money in the long run.