When Is Refinancing Your Home A Bad Idea?
When does it not make sense to refinance? After hearing about interest rates dropping significantly you may feel like your fixed-rate mortgage with an interest rate of 5% isn’t that satisfactory anymore, even though it was perfectly sustainable for you up to this point. It makes sense to wonder whether to refinance or not. The market seems to be in good shape and the idea of saving some cash by refinancing your mortgage seems great. While you might be able to lock in a lower interest rate, there are several reasons you should carefully consider before making your final decision.
Does It Make Sense To Refinance?
Most people turn to refinance as a means to save money, either by getting a lower interest rate or by switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Doing so could also allow you to get cash out of your home equity, if you have any, and use it for home renovations or other expenses. However, it is not uncommon for people to overlook the specifics of their situations, and most importantly, ignore alternative options available to them. If you’re thinking of refinancing, here are five things you should consider first.
When Should You Not Refinance
What are some of the things you should consider before deciding to refinance your mortgage? Is refinancing good or bad? There are many reasons why you should not refinance your home, but it all depends on your unique needs and circumstances.
1. You Don’t Want To Put Down Roots
If you plan on staying in your home for at least a few more years, refinancing could potentially save you money in the long run. With a lower interest rate, you’ll have lower monthly payments, which could free up some extra cash each month. Over time, those savings could add up, making refinancing seem like a wise investment.
However, If you don’t plan on staying in your home for more than a few years, it may not make sense to refinance because you probably won’t have enough time to recoup the costs of refinancing. If you’re not sure how long you’ll stay, consider a no-cost refinance, which allows you to refinance without paying any upfront fees. If not so, you should calculate the time needed to recoup the new loan’s closing cost and decide whether you will be staying in the property for the required timeframe. Either way, it is advisable to take some time and consider your next steps carefully before locking in a new mortgage.
2. The Upfront Cost Is Too High
While refinancing can save you money in the long run, there are upfront costs that you need to be aware of. These can include appraisal fees, loan origination fees, and title insurance. You’ll also have to pay for closing costs, which can add up to several thousand dollars. To get an idea of how much it will cost to refinance, use our Refinance Calculator. This tool will help you estimate your closing costs, and it will also give you an idea of how much your monthly payments could change. Keep in mind that these are just estimates, and the actual cost of refinancing will vary depending on your situation. Asking for the unbiased opinion of a professional fee-based financial advisor is also a sensible option.
3. You Want To Leverage Your Home’s Equity
When having a significant amount of equity in your home refinancing may potentially help you get cash out for major life expenses, such as home renovations or college tuition. Tapping into the equity of your home might seem like a smart move but it actually is one only in case you know you will be financially stable enough to cover your mortgage payments in the long run.
In the event that you don’t have a lot of equity in your home, it may not make sense to refinance. You may be able to get a lower interest rate, but if you don’t have enough equity, you will not be able to save much money in the long run. This is so because you’ll likely have to pay for private mortgage insurance (PMI), which will add to your monthly payments. This is also dependent on the interest rate you can ensure based on your credit score.
4. Credit Score Issues
Your credit score is an important factor in determining what type of refinancing rate you will qualify for. The higher your credit score, the lower your interest rate will be. If you don’t have a good credit score, you may not be able to find a lender who will agree to assist you with a refinance or you won’t be able to get a low enough interest rate to make refinancing worth it. Maybe you should consider putting it off, as improving your credit score, even for just a few points, can make a big difference with regards to the type of rate you can get. You can check your credit score for free online.
5. Paying Significantly More In The Long Term
While a lower monthly payment seems great at first it may be too much for your pocketbook in the long run. For example, being many years into a 25-year mortgage you have paid a lot of interest without significantly reducing your principal balance. If you refinance into a 10-year mortgage you run the risk of agreeing on a higher monthly payment that you possibly won’t be able to afford. This is why you should also seriously consider alternative options such as making extra payments towards your current mortgage. These will help you pay off your mortgage quicker without having to change the terms of your loan and put you at risk of a higher monthly payment.
A huge mortgage might make it much more difficult to handle your finances. A financial advisor can assist you with any questions about taxes, retirement, or long-term financial objectives. Here at Team Sosi, we have lots of resources to help you make the best possible financial decisions for your situation. Give us a call today to get started.
The Bottom Line
What’s your personal verdict? Is it smart to refinance your home? Does it make sense to refinance in your situation? If you’re thinking of refinancing, be sure to do your homework and consider all of your options. Refinancing can be a great way to save money, but it’s up to you to decide on the right time to do it. Keep in mind that refinancing is not for everyone, and it may not be the best option for you in accordance with your financial situation. If you’re not sure whether or not refinancing is the right choice for you, talk to one of our professional Mortgage & Home Loan Advisors in Orange County who can help you make an informed decision, and keep more of your hard-earned money.