Refinancing can save you a lot of money in interest and lower your monthly payment — when the numbers make sense. But there are times when a seemingly money-saving move like a refinance can backfire. Here are five scenarios when you should not refinance:
You can’t offset
Lowering your interest rate is likely the reason you’re thinking of refinancing. But refinancing costs money, whether out-of-pocket or financed into the new loan. You’ll want to make sure you can recoup those costs, which are usually around 2 percent of the borrowed amount. Also determine the portion of a new payment that goes to interest and compare that with your existing deal.
You’re trying to pay off your loan sooner
If you’re making more money since you bought your home, you might be considering refinancing to a shorter-term mortgage, like a 15-year loan, which typically comes with a higher monthly payment but lower lifetime interest costs than a 30-year loan. However, you might want to opt for making extra payments on your current loan to pay it off sooner, thus avoiding refinance costs but still saving in interest.
You have to move to an adjusted-rate
With an adjustable-rate mortgage (ARM), you’ll get a very attractive low interest rate for a set period of time — typically, anywhere from one to seven years — but, unlike a fixed-rate mortgage, your ARM rate will adjust to the going market rate after that. The problem is that interest rates are bound to go up.
You’re going to sell your home in a few years
Again, refinancing costs money; so you’ll want to know that you are staying in your home for a long enough time after the refinance to recoup those costs. Ideally, you’ll want to keep your refinanced loan past the break-even point; that’s when you actually start saving money. If you plan to sell relatively soon, this is a scenario where an adjustable rate mortgage may make sense.
The long-term costs outweigh the savings
Many times refinancing looks good initially, but after a little math, you discover it’s not such a great deal in the long run. Since you’re likely adding years to the end of your loan, even a lower rate may generate higher total interest costs. Ask your mortgage adviser to run the calculations to compare existing loan interest costs vs. a refinanced loan.