5 Reasons Why Refinancing Your Mortgage May Be Wrong for You
With interest rates rising in 2022 after years of record lows, a lot of homeowners who have been weighing whether to refinance their mortgages are suddenly feeling the pressure to either do it or wait for the rates to (hopefully) fall back down.
While refinancing now might seem like a good idea, the reality is that it might not be the best idea for every homeowner. In fact, refinancing at the wrong time can be a costly mistake that you’ll regret making.
If you’re thinking about refinancing, then here are five reasons why holding off might be the right move.
#1: Your Credit Rating Has Dropped Since You Bought Your Home
It’s not uncommon for a lot of homeowners to experience a dip in their credit ratings after they purchase their homes. The most common reason is because they take on too much additional debt which causes their ratings to drop lower than they were when they originally got approved for their mortgage.
The problem is, however, if this has happened to you, then refinancing may not provide you with as low of a rate as you might be expecting. Depending on how much lower your credit rating has gotten, you could even wind up with an interest rate on your new loan that’s higher than your old one.
#2: Closing Costs
Refinancing a mortgage isn’t free. You will have to pay closing costs on your new mortgage just like you did on your previous one, and those fees can add up. As an example, if your closing costs are 5% and your new mortgage is for $200,000, then your closing costs will be $10,000.
If you don’t have enough saved up to cover the cost of closing, then most lenders will usually allow you to roll the fees into your mortgage, but how will that affect your monthly payment? Will you save as much on your monthly payment as you were hoping?
#3: You are Considering Moving
If you are planning on moving in the next couple of years, then refinancing now might not be the best move for your finances. While you will probably save some money on your monthly payment, the time it takes for you to reach your break even point on your closing costs could take longer than you might think. If you decide to move before you reach your break-even point, then you lost money by refinancing your mortgage.
#4: You Want to Consolidate Your Debt
Taking a cash-out refinance to consolidate your debt might seem like a great way to save money because it allows you to transfer high-interest debt into a loan with lower interest, but taking this approach comes with some serious risks.
For starters, you will need to take out a larger loan by tapping into your home’s equity. The amount that is left over after your old loan has been paid is what you will get to pay off your credit cards. Should you start having difficulty affording the higher loan payment, then you can risk ruining your credit or even losing your home. Plus, unless you close the credit cards that you paid off, or at least practice excellent discipline, you could wind up using the cards again and thus increase your debt substantially.
#5: You Mortgage Rates is Still Favorable
Depending on your current rate, it may still be favorable in comparison to the national rate, so there’s no real benefit to refinancing right now. If you can’t secure a new loan with a rate that is at least 1% lower than your current interest rate, then refinancing should wait until you can reach that threshold if you want to enjoy any measurable savings.
The Other Side of the Coin: Reasons Why Refinancing Might Be Right for You
On the other side of this coin, there are some very good reasons why you might want to refinance now. The biggest one, of course, is if refinancing can save you a lot of money on your monthly payment. As stated earlier, for this to happen you need a rate that is at least 1% lower than your current rate.
Refinancing can also be worth it if you are able to eliminate your need for private mortgage insurance. If you have 20 percent equity or more in your home when refinancing, then you avoid paying this costly addition on your monthly mortgage payment with your new loan.
Another good reason for refinancing is if you can shorten the term of your new loan without increasing your monthly payment or at least keeping it within your budget. Your new loan will provide you with a quicker path to paying off your home.
