Mortgage Refinancing: When Not To Take It
Whenever the rates are low, homeowners often ask this question: “Should I
refinance?”
While low rates are often tempting and may be a good indication that
mortgage refinancing is a good idea, that doesn’t mean it can apply to all.
Strange as it may seem, a lot of homeowners will be better off sticking to
their current loan and ignore the current low rates.
That said, there are certain situations when refinancing doesn’t make any
sense. Let us take a look at those scenarios:
• When you don’t plan to live in your home for long
This is really something you should heavily consider. A lot of homeowners
believe that refinancing is a good choice whenever the rates are low. The
fact is, there are certain fees involved in mortgage refinancing that could
only be recouped by staying in your property for a certain period of time
(called the ‘break-even period”) – which may take several years. Hence, if
you think that you will be selling your house a few years from now,
mortgage refinancing may not be for you.
• When the current market value of your property is low
Obviously, it makes no sense to refinance your mortgage if the amount of
new loan is not sufficient enough to pay for the existing one. In the same
manner, if the appraised value of your property is low, your monthly
payment for the new loan may be higher than your current loan.
• When you are paying for your loan for several years
Say you are on the tenth or twentieth of payment on a 30-year loan.
Refinancing it to another 30 years will only increase the overall cost of
your loan.
• When you have a few years left on your loan
Even if you’re in dire need of cash, it not a good idea to refinance your
home with only a few years left in it. Extending your payment terms will
push you to pay more. For example, you have 5 years left on your mortgage
and you apply of refinancing which will extend it to 10 more years (15
years loan), the total cost of the new loan will be more than what you
should pay for the 5 remaining years even if the monthly payment are
significantly lower.
• When you don’t know how to budget your cash well
It is a common strategy to use refinancing to pay for credit card bills.
While this may be a wise choice for some, others who cannot manage their
finances well may find it rewarding at first but very painful in the end.
Not only will you place your house on the line, you are also placing you’re
your whole financial standing at risk. (Take note: refinancing doesn’t
erase your credit, you are just restructuring it.)
• When you have already used up all the equity of your home
One factor that will greatly influence the rates of your new loan is the
amount of equity you have in your property. If you have already borrowed
ninety percent of you more of your equity, chances are, you are just adding
on your financial burden and not really benefiting from the advantages of
refinancing.
• When you have a bad credit score
Aside from equity, your credit score is a significant measure whether you
get a good rate or not. So if you have missed payments and pilled up credit
card bills, you may not be qualified to a better rate.
