Mortgage rates have been historically low over the last year. This has sent flocks of homeowners scurrying to their lenders for help refinancing their homes. What many fail to consider, however, is that although you may have good reasons to refinance your home mortgage, refinancing isn’t always a good idea for everyone.
Though you could potentially secure a lower interest rate, you may put yourself at a disadvantage in other ways. The refinancing process can be expensive and requires a credit pull. So before you dive in, consider your reasons for refinancing, and determine whether it could create a worse situation than before. We’ll describe some of these disadvantageous scenarios below.
You Plan to Move Again in the Near Future
If your current home isn’t in your long-term living plans, you should not refinance it. It isn’t sensible to refinance your mortgage if you are going to sell the home in a few short years. The amount it costs to close on the refinancing process will likely exceed the savings of a lower interest rate and payment over the few years you’ll stay there.
The point at which you have fully recouped your refinancing costs is referred to as the “break-even point,” and this figure will tell you how long you should stay in the home to benefit from a refinance. You can calculate your break-even point using this formula:
Cost of refinancing: $4,000
Monthly savings: $120
Divide the costs by the savings.
4,000 / 120 = ~33
So, it will take approximately 33 months (the break-even point) until you break even on refinancing fees and start saving money.
You Want to Treat Yourself
It can be tempting to tap into the equity of your home in order to splurge a little. But without a smart financial goal in mind for this money, using it for the wrong purposes can be detrimental to your overall financial health. You should not use your equity to take a luxurious vacation, to buy expensive new toys, or anything else to fund a lifestyle beyond your means. This is a risky tactic.
You Don’t Have Enough to Pay for Closing Costs
Don’t forget that you’ll need a few thousand dollars on hand to close on a mortgage refinance. This money covers appraisal and origination fees, credit report charges, and so on. If you have little to no money to cover these costs, you might be able to roll them into the loan, but this reduces the equity you’ve built and minimizes the benefit of a refinance.
Your Credit Score Needs Improvement
In order to qualify for those ultra-low rates, your credit score needs to be in pristine shape. If it isn’t, you should wait a little while and focus on lowering your outstanding balances, making payments on time, diversifying your credit, paying off bills in collections, and resolving any mistakes on your report.
You Want to Lengthen the Term of Your Loan to Save Money
It may seem logical to refinance from a 15-year term to a 30-year term so you can save money on monthly payments. But if you aren’t currently struggling to make ends meet, the costs of refinancing to a longer term can outweigh the savings over time. When you refinance to a longer term, you end up with a higher interest rate and will end up paying thousands more over time than you would have if you’d stuck with a shorter term.
How Often Can You Refinance Your Home?
There are no definitive limits on how often you can refinance your home, but keep in mind that each refinance comes with fees and credit inquiries for which you need to be prepared. If your credit score has dropped since the last time you refinanced or bought your home, you may not even be able to find a lender who will let you refinance.
Speak to Our Mortgage Professionals for Further Guidance
Not sure if refinancing is right for you? Loan Remedy is here to help. Our friendly team will talk you through your situation and advise you as to whether or not now is the right time. If it isn’t, we’ll do everything we can to help you improve your situation so you can qualify for the best mortgage rates. Contact us today for a consultation.