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5 Reasons to Avoid Refinancing Your Home

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refinanceMy husband and I are in the process of deciding whether or not to refinance our home. We’d like to take advantage of record low interest rates, but there are thorny issues that tend to get in the way.

While refinancing is generally thought of as a good thing, especially if you refinance to a fixed rate, or to a much lower rate, it’s not for everyone. In some cases, it just doesn’t make sense. Here are 5 reasons that you might want to think twice about refinancing your home:

1. High Closing Costs Outweigh the Savings

Run the numbers. Do the closing costs outweigh your savings? In most cases, your closing costs are overcome when you are in the house long enough that the interest savings make up for the cost of the loan. If you plan to leave soon, selling the house, you might not break even.

This is one of the issues my husband and I are facing. We don’t know how long we’ll be in our home. There is a chance that we will move this year, so any refinance with closing costs would probably cost us more than we’d save

2. Credit Problems

Refinancing doesn’t make sense if you can’t get a lower rate. While it’s true that you can refinance to a 30-year fixed at 3.54% as of this writing, not everyone gets access to those rates. Only those with the best credit can expect to see such great rates. If your credit isn’t great, you will likely pay a higher rate. If you can’t qualify for a rate that is at least 1% your current rate, it might not be worth it for your to refinance.

3. Long Term Extension

If you only have 10 or 15 years left on your mortgage, refinancing to a 30-year mortgage isn’t the savviest things to do. Even with a lower interest rate, stretching your mortgage out that much can result in a much larger repayment amount. Before you refinance, it’s important to consider more than just the rate; you also need to consider the term length and understand the math involved in tying yourself down to a mortgage for that long.

4. You Plan to Cash Out

Maybe your main reason for refinancing is to cash out. This can be a problem. If you use the money to pay off credit cards, you are taking unsecured debt and securing it with your home. Whether you plan to use the money for a vacation or a wedding, the reality is you have just used your home to act as collateral. If you can’t pay, you lose your house. Stop and consider the reasons you want to refinance. If your biggest draw is the cash, think twice.

5. You Need Extra Money to Make it Work

In some cases, you might be required to use a “cash-in” refinance to make it work. If you don’t qualify for one of the government’s programs for refinancing, you might be underwater on a mortgage. In order to refinance, the bank might want you to have at least 20% equity in your home. Another possibility is that your refinance would put your loan in “jumbo” territory, meaning that you don’t qualify for the better rates that come with smaller loans. You either have to pay the loan down so that it is no longer considered a “jumbo” loan, or you have to accept the higher rate. If you can’t free up the cash to make it work, refinancing could be off the table.

(Photo: woodleywonderworks)

{ 14 comments, please add your thoughts now! }

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14 Responses to “5 Reasons to Avoid Refinancing Your Home”

  1. Scott says:

    Regarding #1, many loans don’t allow you to refinance if you are planning to turn right around and sell the property. I know ours didn’t. We signed at least a few forms to this effect.

  2. MonkeyMonk says:

    Also regarding #1: When we refinanced last year we were offered a number of 100% no-cost refinances that had rates only .125 to .25% higher than other refis with hefty closing costs.

    I estimated that we would need to be in the home 11 years before the better rates paid for themselves so we went with the no-cost refi.

  3. We have a small mortgage on our townhouse and the closing costs would eat us alive. That is the only reason we haven’t and wont refinance our townhouse. No one in their right mind would give us a no cost refinance either unfortunately.

  4. David S says:

    Regarding #5: Just because you need to pay extra money doesn’t mean you should avoid refinancing. To refinance out of PMI we needed to pay into the mortgage. However adding up the PMI, interest spread on old to new mortgage and the lower total interest charge on a lower mortgage balance equates to saving the amount that we had to pay in 6 years. (We had to pay down from 94% to 80%).

  5. Michelle says:

    We decided not to refinance since we knew that we would be moving relatively soon.

  6. Guy In San Antonio says:

    You need to ask for a no fee (not no money out of pocket) refinance. The difference is that a “no fee” refi, or “low fee” refi, means you are only being charged for something minimal such as a $400 appraisal. THe other one just rolls all the fees into your new loan. Both options cost you the same amount at closing, but the second one increases your loan balance. The second option may be a lower rate of 1/8% or so, but the fees make the break even more of an issue.

    You lender is not going to offer this up front if at all. If they don’t, go to lending and find a lender who will play ball.

    When I started this process, my own credit union offered me 3.375% with $5,000 in fees that they would be so nice to me and just add to my loan balance. I found a lender in Houston through lending tree that got me 3.25% and I only had to pay the $400 appraisal. My loan I had at the time was at 4.375%

    You do the math, but the break even is a no brainer

  7. Refinancing can be great if you can either reduce your monthly payments or reduce the duration of the mortgage without increasing your monthly expenses. My friends were able to refi a 6% 30 year mortgage with over 200K balance to 3.5% and 15 years with very little refi costs and no real increase in monthly payments. So 5K something in fees, saved them 15 years of payment!

  8. Bryan says:

    Rohit, that is exactly what I did. My payment went up $10 a month going from a 30 year (with 25 years left on the loan) to a 15 year. Total cost of the refi was $800, but the math says it will only take me 1.5 years to cover the refi costs, and the rest is savings.

  9. Tony Lovasco says:

    #3 forgets that you can pay off the loan early.

    If your mortgage is only 10 or 15 years from being paid off, you could refinance to a lower rate, and pay it off even quicker — simply by making the same size payments you made before the refinance.

    The fact that the loan *could* go longer doesn’t mean anything unless you actually carry it to term.

  10. Ben Auletta says:

    item 3 –long-term extension can be an advantage if it’s handled wisely. a longer-term results in a lower monthly payment, but most mortgages allow for prepayment with no penalties. Therefore, if you feel comfortable with your current monthly payment, and it is higher than the required monthly payment, continuing to make these payments results in more money coming off the principal and a shorter payoff time. However, if you’re short on money in a particular month, You can just go back to the minimum payments required.

  11. Susan says:

    Jim Wang and others: what’s your thinking on reverse mortgages?

  12. Pam says:

    It definitely wouldn’t make sense to try to refinance your home unless you counted all the costs and they were much less than your potential savings. If your interest rate is only going to decrease by a slight amount, it wouldn’t save you enough to make it worth the hassle. Make sure you do your research before considering a refinance.

  13. admiral58 says:

    It’s almost too late as interest rates were already so low a few months ago.

  14. Jason says:

    Years ago we refinanced when mortgage rates had dropped to 5.25%, a great deal at the time. We didn’t have higher fees; as a matter of fact, we not only got a drastic reduction on our mortgage but we got money back on the deal, which we used for home improvement.

    We’d only been in the house a couple of years so adding two more years wasn’t a big deal. Even at 3% or so we’d wipe out almost 10 years of payments if we did it again. If we wanted to start from scratch we’d go with a new house rather than going that route. However, for people with interest rates over 10%, or those who are hurting from the past few years in paying their mortgage, it might be the best option to look at.

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