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Reasons Not to Refinance Your Home
If you’ve locked your 30-year fixed-rate mortgage with a higher interest rate when you first got your loan.
But then when the interest rates started dropping, you can lock in a lower interest rate and save yourself some money.
It may be true, that millions of borrowers are now refinancing and saving at a lower rate but before signing on the dotted line there are a few things that you need to consider.
There are many times when refinancing isn’t the logical choice because it may impact your financial condition.
There are other real estate investment opportunities that you might want to consider first.
Today we will look at the top four of the most common reasons not to refinance your home.
When Not to Refinance your Home:
1. A longer Break-even Period
One of the first reasons not to refinance your home is that it takes too much time for you to recover back the new loan’s closing costs.
The number of months to reach the point when you start saving is known as the break-even period. After which you fully offset the costs of refinancing.
To come up with a workable estimate you have to consider few factors like how long you plan to stay in the property and how certain you are about that prediction will be the determining factor.
You’ll need to know few facts if you want to calculate your break-even period. The closing costs of your new loan and its interest rate are the deciding factors.
Once you are aware of the interest rate, you can figure out the amount you’ll save every month.
Your lender should be able to give you an estimate of these figures. For instance, your closing costs to refinance amount to $3,000 and your potential monthly savings are $50. This is how you can calculate your break-even period:
Closing costs ÷ monthly savings = Break-even period
$3,000 ÷ $50 = 60
This shows that you will take 60 months (5 years) to reach your break-even period.
2. Higher Long-term Costs
After speaking to your bank or mortgage lender, review what refinancing will do to your net income at the end of the day.
Refinancing to lower your monthly payment is great provided it does not put a big hole in your pocket in due course.
It definitely is a good reason not to refinance your home if the refinancing is going to cost more.
For example, if your 30-year mortgage is an old mortgage of many years and you’ve paid a lot of interest without reducing your principal balance, then refinancing into a 15-year mortgage will invariably increase your monthly payment to such a level that you won’t be able to afford.
And if you decide to start over again with a renewed 30-year mortgage, you are going to start with almost as much principal as the first time.
Even if your new interest rate is lower, you’ll be paying it for 30 years, making your long-term savings inconsequential, sometimes the overall loan could cost you more.
Only if your lower monthly payment is saving you from defaulting on a current, higher payment, then it is worthwhile.
The refinancing process also involves opportunity costs that should not be ignored.
Because refinancing a mortgage involves time and effort. You might have more fun and make more money doing the home improvement projects, getting a certification, or looking for clients.
3. Adjustable-rate vs Fixed-rate Mortgages
Substantial savings are not always a result of refinancing to a lower interest rate. For instance, if the interest rate on your 30-year fixed-rate mortgage is already quite low.
Then you wouldn’t be saving much if you refinanced into another 30-year mortgage fixed for a 0.5% difference.
Once you consider the closing costs then the monthly savings wouldn’t be so remarkable except when your mortgage is bigger than the national average.
So getting an ARM – adjustable-rate mortgage could look like a better option because they typically have the lowest interest rates.
But when rates are historically low, then they possibly won’t go any lower in the future. Meaning when the ARM resets you’ll probably face substantially higher interest payments.
If you already have a low fixed interest rate and are managing your payments, then it’s a better idea to not venture into the unknown.
Because a fixed-rate mortgage is any time safer than an adjustable-rate mortgage.
Because when you stick with a low fixed rate you may save thousands of dollars in times to come. This is another situation when not refinance your home.
4. Unaffordable Closing Costs
Refinance is never free, it either involves paying the closing costs out of pocket or paying a higher interest rate.
Some lenders allow you to roll the closing costs into your loan. what happens then is you are left with paying interest on closing costs for the life of your loan.
Along with closing costs, application fees, underwriting fees, and processing fees are included overall making it an expensive affair.
Before refinancing you need to think if you can immediately afford to spend several thousand dollars on closing costs?
Or is that money needed for something else? Is it worthwhile to refinance when the interest rates are higher?
If you’re going to roll the closing costs into your loan, then the supposedly ‘lower interest rate’ is going to cost you thousands of dollars over 30 years.
Conclusion
If you find a long break-even period, that is the number of months to reach the point when you start saving, then that is the reason not to refinance your home.
When you refinance to lower your monthly payment then it is worthwhile, provided you’re not spending more money the fullness of time.
If your interest rates are already low by historical standards then moving to an adjustable-rate mortgage is unreasonable.
If you can’t afford the closing costs then it is enough reasons not to refinance your home.
