6 Reasons You Should NOT Refinance Your Mortgage
If there is one thing that remains constant, it’s that interest rates go up…they go down…but they rarely remain the same. But with every decrease, you have an opportunity to take advantage of the lower rates. However, refinancing your mortgage may not be for everyone. Here are six reasons why you should not do so.
Debt consolidation: While you may have enough equity in your home to pay off credit cards or signature loans, stop and do the numbers. Let’s say that the unsecured loans will pay off in less than 5 years. If you refinance them, and even reduce your mortgage term to 15 years, you’ll probably be paying more interest over the long run.
Increasing the term of the mortgage: While a lower interest rate can save you a ton of money, don’t make the mistake of adding additional years to the new loan. Let’s say that you started with a 30-year fixed rate. You’ve been making mortgage payments for 3 years now. Don’t refinance again for 30 years—look at the payment, with the lower rate, based upon a 25-year term instead. Going back to 30 years means you’d be paying your mortgage for 33 years.
Planning to move before recovering closing costs: There are closing costs when you refinance your current mortgage. As your loan officer, I can run the numbers and let you know the number of years it will take you to break even and recover your closing costs. So, if you are planning to move within the next 2 years, but it will take you 5 years to recover your costs, you may not want to refinance at this time.
If you want to switch from an ARM to a fixed rate: When it comes to adjustable rate mortgages, these days, it may still be the best rate available—without having to refinance. I can review your current ARM terms with you, what index the loan is tied to, when it will adjust, and the interest rate caps. While it might be better to obtain a fixed rate, again, it’s important to look at the big picture.
To obtain cash: It will depend upon the reasons you want or need the cash. Are looking for cash to create a “cushion” for emergencies (because you don’t have one now)? Are you planning to buy more real estate? College funds? Or Invest in a new business? Compare. For example, is the interest rate cheaper to get cash out for your child’s college education than it would be to get a student loan?
To get a no-cost mortgage: There are three options when it comes to closing costs. You can add the closing costs to the loan and obtain a higher mortgage. You can “cover” the closing costs by paying a higher interest rate. Before choosing the option, run the numbers based on the different interest rates, loan amounts and loan terms and choose which one is best for you.
The bottom line: Do the math. If you are looking to refinance, I can help you with the different options mentioned above.