3 Reasons Why You Shouldn't Refinance a Mortgage

ShutterstockIf your budget is tight, refinancing to lower your monthly payments might seem great, but it can hurt you in the long run.
By AJ Smith

Calculating how much house you can afford is, for many of us, one of the toughest decisions we face in adulthood. How we finance that home can be just as challenging. In an ideal world, we would get it right the first time. But refinancing offers a chance to do it again -- in many cases to lower the interest rate or payments, or to shorten the term.

While there is potential to save, refinancing is a complicated process and not the right decision for everyone. Check out why now may not be the time for you to refinance your home.

1. You Don't Plan to Stay Long: It's a good idea to figure out how long you plan to stay in your home and be honest with this prediction. If you hope to be moving before the "break-even" period, or number of months it will take to make up the costs of closing a new loan, refinancing is not for you. It's best to run the numbers on a refinance and determine what the break-even point will be for you. Then you can

Refinancing always has a price tag -- either through closing costs or a higher interest rate moving forward.

compare this with your current life plans. Things may change but if you are pretty sure you will be moving soon, refinancing may cost you more than it will save you.

2. The Long-Term Costs Are Too High: If your budget is tight right now, it can be very tempting to lower a monthly fixed payment like your mortgage. But while refinancing to lower your monthly payments seems great, it can hurt you in the long run. Extending the length of your loan may free up more cash in your monthly budget but it can also lead to you paying more for your home in terms of interest.

On the other side, refinancing to shorten the mortgage length can help you pay off your home faster but isn't smart if it increases your monthly payments to more than you can comfortably afford. Be sure to calculate the long-term cost of a new mortgage and focus on more than just the monthly costs before making a final decision.

3. You Can't Afford the Closing Costs: Refinancing always has a price tag -- either through closing costs or a higher interest rate moving forward. While some lenders allow closing costs to roll into the loan, this just means you are paying even more interest for the same principal you were already paying off. If you cannot afford to pay the closing costs upfront, refinancing probably isn't for you.

Replacing an existing loan with a new one can be beneficial, but clearly involves its drawbacks as well. Refinancing can cost between 3 percent and 6 percent of the loan's principal and a headache-inducing amount of paperwork. The best way to decide whether to refinance your home is figuring out how much you will save and how much the process will cost in fees.

It's important to remember that when you refinance your mortgage, you will have your credit scores checked by the lender. If you want to know where your credit stands, you can see two of your scores for free and get a personalized action plan for improving your credit on Credit.com.

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I have a 30 yr mortgage with 8% with 10 yrs 11 left. I was going to refinance to @ 2.75 interest rate for 10 yrs with a 36000 payoff taking 8000 out for repairs so I will finance a total of 47000 by time everything is done. I didn't like what the ending number was higher than now. my goal is to sell this home if possible but since it hard to sell right now I thought I would get the monthly payment lowered in case I have to rent it or sit on it while trying purchase another home in the near future. Any other suggestions, I know to not do the 8000 take is one.

June 21 2014 at 7:22 AM Report abuse rate up rate down Reply
1 reply to Derrick's comment

If you take the mortgage as you planned, 47000 @ 2.75, and use the 8000 for repairs, make sure you put all the 8000 into repairs, and document the expenses. It will come in handy if you sell the house, because those expenses count toward the "original cost" of the home. When you sell it, except for an amount exempted for being your own residence (don't remember how much, it is pretty high, like 250000) any profit (the difference between what you paid for the house and what you sell it for) will be subject to tax. Also, documenting the repairs made will make it more attractive to a prospective buyer, like "new roof" in the ads for the house. In most states, there is no prepayment penalty on home mortgages (CHECK YOUR STATE!) so you can always dump more $$ on paying off the mortgage early, and save yourself some interest. Make sure extra payments go on the principle of the mortgage, not into escrow, and the nice thing about a ten-year mortgage is that it forces you to pay it off in ten years. What is the loan cost? If you don't like that number, shop around.

June 21 2014 at 11:26 AM Report abuse rate up rate down Reply
1 reply to Sherrie's comment

I was also given a choice of a 5 ARM 30yrs to lower payment, but I will I be paying interest mostly and will cause any problems if I have a opportunity to purchase a new home within the next 6 months to a year or so?

June 23 2014 at 8:03 AM Report abuse rate up rate down

Refinancing your mortgage does take a lot of planning. Borrowers should look into the costs of refinancing and compare them to the actual savings. It is also important to look at changing both the rate and the term of the mortgage. Refinancing back into a 30 year mortgage will actually cost the borrower more. There are also more costly mistakes that borrowers can make when refinancing.

June 20 2014 at 7:16 PM Report abuse rate up rate down Reply