Refinancing can come with numerous benefits, especially now, when mortgage rates register record lows. However, there are times when it might not be such a good idea, when you could actually lose money instead of saving. This article will tell you when not to refinance.
It’s always important to do your homework before making any important financial decision. Refinancing is one such decision. If you’re not careful, it can really hurt your financial health. And you might not only lose a lot of money, but also your home.
When not to refinance
When you can’t lower your interest rate enough to offset refinancing costs
Lowering your interest rate is the main reason to think about refinancing. It’s a great way to save money. But don’t forget that refinancing also costs money. Before you sign any papers, make sure that the new loan and these extra costs won’t end up costing you more than your current loan.
When you’re trying to pay off a loan sooner
If you’re in a great place financially, you might want to refinance your loan to a shorter-term mortgage, such as a 15-year loan. It usually comes with higher monthly payments, but you can save money by reducing the amount of interest that you pay.
But, if you’re able to make larger monthly payments, it may not be necessary to refinance. You could just make extra payments on your current loan to pay it off sooner. This way, you will still save on interest and also avoid the costs that come with refinancing.
When you plan to sell your home in the near future
In addition to costing money, refinancing can also make it harder for you to sell your home. If you plan to sell your home in the near future, see if you can pass the break-even point on the new loan. Only then can you save money. Otherwise, you’d just be throwing money away on refinancing.
When the long-term costs outweigh the savings
Again, it’s important to do your homework. Refinancing might look good at first, but, if you add up all the costs, it might turn out to be a bad idea. Ask your mortgage adviser to calculate how much interest you’re going to pay on your existing loan over however long you believe you will keep the loan. Or do it yourself with the help of a mortgage calculator. Afterwards, compare the result to the overall costs of the proposed loan and the interest it will bring with it over the same period. If you can’t save anything, then avoid refinancing.
When you have to move from a fixed-rate mortgage to one with an adjustable rate, in order to lower your rate
Adjustable-rate mortgages can be very attractive. They come with low interest rates for a set period of time, usually between one and seven years. But, after that, the rate will adjust to the going market rate. And you can’t stop rates from going up. If you can’t handle the higher payments, if they go up, then you shouldn’t refinance to an adjustable-rate mortgage.