Should you refinance your mortgage?
While the savings from refinancing can be quite substantial in some cases, there are instances where the fees that you will pay for a refinance loan can erode your cost savings, making it an almost worthless endeavor.
When Not To Refinance
1. If you have been paying down your mortgage for several years.
Most homeowners realize that they pay a significantly larger portion of interest rather than principal earlier in their mortgage. As you continue to pay down your balance, that ratio of interest-to-principal begins to shift, and you find yourself paying more principal than interest later in the loan.
If you refinance your home into a loan that’s the same length as your existing mortgage the interest rate and monthly payments may be less but you start that process all over again.
The majority of your early home loan payments go towards interest rather than principal debt. As the years drag on, you wind up spending more on interest than you would have if you’d stuck with your original home loan. This is why many borrowers opt for higher payments and shorter mortgages when they refinance.
2. If you’re moving sooner rather than later.
There is a specific break even point that you need to stay in your home after refinancing your loan in order to make the savings outpace the fees that you paid. When you refinance you usually must pay 3% or more of the balance in loan origination fees to obtain a new mortgage. It can take several years for your monthly savings to begin paying off those fees. Only refinance if you are staying in your home several more years.
3. If you will have to pay your mortgage lender a prepayment penalty.
While paying off your home loan is a good thing for the borrower, it is not always the best deal for the lender. Many lenders, especially those who still hold older home loans, may have a prepayment penalty that would impose a fine on you if you tried to pay off your mortgage earlier than its stated terms.
Depending on how much the penalty was for paying it off early, those fines may eat away at the savings you would have enjoyed from a new home loan.
This refinancing calculator can help you decide whether a new home loan is right for you.