With interest rates still hovering around historic lows, it can be tempting to dive into a refinance without taking a good hard look at the pros and cons. But while refinancing is generally touted as a money-saving move, it doesn’t come without cost.
Here are a few situations where the costs may not outweigh your gains.
You can see yourself relocating in the next few years. If you don’t think you’re going to stick with your mortgage for the next two or three years, there isn’t much point in refinancing. Closing costs typically cost between 2% and 5% of the loan amount, so even if you are saving significantly on your monthly payments, it will take you a year (or several) to break even.
You need money. If your primary reason for refinancing is to tap into your equity, then you should proceed very carefully, especially if you’re already in trouble financially. Hoping that a lower interest rate will balance out the closing costs and other fees is never a good way to go, and if there’s any chance you may not be able to make payments later, it’s best for you to leave your money in your house.
Your mortgage is almost paid off. If you’re already fairly late into your mortgage, then most of your payments are going straight to your principal. Once you refinance, though, you reset the amortization process. While your payment may be lower, a greater percentage of what you pay will go toward interest.
And that’s not even getting into the fact that you end up resetting your term, as well. That means that unless you switch to a shorter term (and then risk having larger payments), you’re essentially starting from square one on a new loan. If you’re on the home stretch, you may do better to just stick it out.
The numbers don’t work out. If you’re considering refinancing to a rate that’s only slightly better than yours, then there’s a very good chance that you may up wasting a lot of time and money in fees and closing costs for very little return. Do your math, or consult an expert before making a move you could regret.