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Mortgage
January 15, 2016

When is Refinancing the Wrong Move?

Simple. Thrifty. Living.

When home mortgage interest rates dip significantly lower than what they were when you first purchased your home, it may make sense to refinance your mortgage in order to secure lower monthly payments. However, there are also times when you would be wise not to refinance, as there could be other financial repercussions. Learn when you should hold off on refinancing.

Mortgage lenders base the interest rate they give you on your credit score, so if your credit score isn’t doing well at the moment, you aren’t going to be able to refinance at a rate as low as you were hoping. That doesn’t necessarily mean you won’t end up with a better mortgage than what you currently have, but to truly take advantage of a great refinance, it is best to wait until your credit is in better condition.

If you are planning a move sometime in the future, it doesn’t make sense to refinance. Even though lower monthly payments sound attractive, you’ll have to pay out hefty fees in closing costs for the refinancing. Depending on how much the closing costs are, it could take you several years before you actually break even and start saving on your monthly payments.

Suppose your credit is excellent and you aren’t planning on moving, but don’t have enough cash on hand to cover the closing costs needed for refinancing. You have the option of a “no closing cost” refinancing, in which the closing costs are actually added to the total loan. However, if it is a significant amount, you’ll wind up paying more in interest as well, so you need to carefully consider how much you’ll actually be saving.

Again, you must carefully calculate the savings involved. For example, if you only have 10 years left on your current loan and are going to refinance to a 15- or 30-year loan, your payments may seem much cheaper, but you’ll also likely wind up paying more in interest over the term of the loan.

Before making the decision to refinance, it is a wise idea to speak with a financial advisor who can help you make an informed decision.

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