When You Should NOT Refinance
Interest rates continue to remain low and many homeowners are tempted to refinance their mortgage. While refinancing can be a great financial benefit to many, there are instances when you should not refinance. Determine whether any of the circumstances below apply to you.
When You Should NOT Refinance:
You won’t be in the home long enough.
If you are anticipating selling to home in the near future refinancing may not be your best option. There are closing costs associated with refinancing a home. Calculate the break even point of your loan. How long will it be before you start seeing a savings each month in addition to the fees you’ve already paid? Explore other mortgage options if you won’t be in the home long enough to break even.
You only need a small amount of cash out.
Many homeowners choose to refinance their home to access some of the equity they have in their property. If you are looking to only get a smaller amount of cash out utilize a home equity loan. You’ll avoid the expensive closing costs associated with a refinance, but still have the benefits of the tax deductions.
You’ll be significantly increasing the length of your loan.
If you’ve paid most of your current mortgage back it may not be wise to refinance to a longer term. Most of the interest on the loan is paid in the beginning, so you’ll have to start the process of paying a higher amount interest all over again. Additionally, your principal balance may not be much lower than the balance at the beginning of your current loan. Consider whether the savings will be significant enough to increase your term and the amount of interest you pay each month.
You aren’t ready to change your financial ways.
Many homeowners refinance their mortgage to consolidate consumer debt that they have. Consolidating debts into one payment with low interest can seem like a great idea upfront. However, if you don’t become more conservative in your spending you can end up with the same amount of consumer debt in addition to your higher mortgage amount. This can become a slippery slope ending in financial disaster if you aren’t prudent.
If you find yourself in any of the situations above there may be other ways to meet your financial needs. Consider a second mortgage or home equity loan to utilize the equity in your house. Discuss with your mortgage professional whether or not refinancing is in your best interest.