Refinancing your mortgage can drastically lower your monthly payments, especially since rates are still very low. The decision to refinance should be an easy one, right? Not so quick.
Refinancing isn't for everyone or every financial situation. Here are five times you should hold off on refinancing your mortgage.
1. You Don't Plan on Staying in the House
If you plan on selling your home in the next five years, then hold off on refinancing it. The move will likely only waste your time and money. Selling too soon after refinancing means you won't live in your home long enough to capture the savings benefits of lower rates. Plus, you'll still owe any fees associated with the new loan.
We made the mistake of refinancing our other home from a 30-year mortgage to a 15-year mortgage. Our broker had talked us into it, saying it was a smart option. It wasn't. At the time of the refinance, I was pregnant with my second child, and truly planned to live in our first home for many more years. However, two kids under three plus one room equals a lot of sleepless nights.
The decision to refinance ended up costing us more initially and monthly, especially since we sold our home just nine months later.
2. The Savings Don't Add Up
The reason why many individuals choose to refinance their mortgage is because they want to get a lower interest rate. Before you jump on the refinance wagon, do a little bit of calculating. Find out how much the refinance will cost you compared to how much it will save.
Also realize that a refinance can add years to your loan. Don't automatically believe that you are benefiting from lower monthly payments if your loan has been extended an additional five years.
3. You Are Trying to Pay Off Your Loan Sooner
As I mentioned before, we refinanced our home to a 15-year loan because we wanted to pay off our mortgage faster. On paper, the numbers made sense, and the change was only going to cost us an extra $300 a month, which seemed doable. However, it would have been better for us to keep the 30-year loan and make the extra payments on our own terms. This would have given us more wiggle room in our budget for unexpected costs.
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4. You Are Switching to an adjustable-rate mortgage
Adjustable rate mortgage (ARM) rates are tempting to jump on, especially since they guarantee a low rate for a certain amount of time. However, interest rates eventually will go up. It's just the ebb and flow of the economy.
With an ARM, you will pay more of the principal faster, which is nice, but you better be prepared to pay higher payments when the rates go up.
5. You Aren't in the Right Position to Finance
If for some reason your home has dropped in value, refinancing your home can tack on extra costs, such as private mortgage insurance. Borrowers with small down payments — or refinances with little equity — have to pay PMI until their equity reaches 20% of the home's value. For example, if you bought your house for $250,000, paid off $30,000 of it, but the value of your house dropped to $225,000, you would have very little equity in the home and in most cases have to pay for PMI.
Another thing to consider before you refinance is your credit score and job history. If your score has dropped even just a little, you could miss out on qualifying for the lowest rates, which would make the whole refinance process not worth it. Also, if you recently switched career fields, i.e. going from a teacher to a computer system administrator, your pay might be higher, but your duration of employment might make you ineligible for a refinance.
Refinancing is a good choice if it means you can ditch annoying PMI fees and score a lower interest rate. However, a refinance is not for everyone, so be sure to crunch the numbers first.