Refinancing your home loan can be a really smart financial decision under the right circumstances. But there are times when getting a new home loan definitely isn’t the best choice. In particular, here are three situations where you could end up coming to regret your decision to refinance.
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1. When you can’t qualify for a lower interest rate
The goal of refinancing is generally to reduce the interest rate you’re paying on your current home mortgage loan. If you cannot qualify for a lower rate than you are currently paying, then refinancing would be a mistake. If you ended up taking out a new mortgage at a higher rate, you’d be raising your total borrowing costs.
2. When you’ll be moving soon
If you can refinance and reduce your interest rate, you should be able to save on your mortgage. However, you must take into account the fact that there are upfront fees to pay when you refinance. These fees are called closing costs, and they could add up to several thousand dollars.
In order for refinancing to make sense, the money you save by reducing your interest rate would need to cover the upfront fees you pay. Otherwise, you won’t break even after paying those costs. And if you are moving soon, the savings realized from refinancing may simply not be enough to cover those fees before you relocate.
Ideally, you’ll want to stay put in your home long enough after refinancing that you not only cover the costs but actually end up better off for having refinanced.
Let’s say you spend $5,000 on closing costs and save $70 per month on your mortgage payment. By dividing $5,000 (your closing costs) by $70 (your monthly savings), you can see it would take you almost six years (71 months) for the saved $70 to make up for the $5,000 upfront expense.
3. When you stretch out your repayment timeline too much
In some cases, when you refinance, you’ll make your loan payoff time longer. For example, if you have 10 years left on your mortgage and you refinance to a new 30-year loan, you’d be adding a whopping 20 years to your payoff time.
Making your repayment timeline longer will reduce the amount you pay each month — perhaps by a lot. However, even if you reduce your interest rate, you will end up paying a lot more interest since you’ll be making payments for a longer period of time.
To avoid ending up with a loan that costs you a lot more over time, aim to stick to a repayment timeline close to the length of time left on your current loan. If you only had 10 years to pay back your current mortgage, for example, refinancing to a 10-year or 15-year loan would be a better option if a refinance lender makes that possible.
You should be sure to look at total costs of refinancing, including repayment costs over time and closing costs, so you can make the right choice about whether getting a new home loan is a sound financial decision or one that you could come to regret.