Finance Friday: 7 Reasons You Shouldn't Refinance Your Mortgage

Welcome to Finance Friday, our series focusing on personal finance, how you save how you spend, and how you make it all work. If you have a story about a big financial decision you've made, a mistake you're working on fixing, a financial success, or any other personal finance issue, let us know. We'd love to interview you and share your story. Today's post is about refinancing, which can seem like a great idea, especially if it might lower your monthly payment. But there are times when refinancing your mortgage isn't the best choice.

  1. Weak Credit.  Refinancing your mortgage is a good idea if your credit score is somewhere between 750-850. But, if your score is lower – say, below 700 – you’ll find it a lot harder to qualify for attractive mortgage rates, which defeats the whole point of refinancing. Try waiting 24 months until your credit score improves.
  2. Fees. Refinancing isn’t free. Between the appraisal fees, title insurance, and document prep fees, you might end up barely breaking even on your monthly rates. Or worse -- you might lose money. Before you start, calculate how long it will take you to break even at your new rates. Depending on how much your lending institution charges, it may take years for this to happen. Use our refinance calculator to get your numbers.
  3. Longer Loan Term. Refinancing your loan may reduce your monthly payments, but it also ties you to a longer loan term with the bank. So if you only have ten years left on your loan, refinancing your mortgage can add an extra decade (or more) to your loan term, and you'll be building equity at a much slower pace. If you stick it out with your older plan, you’ll be able to pay your mortgage much faster.
  4. Difficulties Meeting the Loan Requirements. Refinances aren’t guaranteed. You’re essentially applying for a new mortgage that pays off your old loan. This means that you’ll have to go through all of the mortgage qualification steps you passed for your first application. But if something’s changed, on your end or the lender’s, you might not meet the qualifications this time around.
  5. Recent Refinancing History. You can refinance your home as many times as you want. In theory.  But if you’ve recently refinanced and you’re struggling to meet your monthly rates, refinancing again might not be the solution. In fact, most lenders won’t want to refinance, especially if the financing was done less than a year ago. Plus, refinancing often makes your home’s equity go down and your mortgage fees go up. So unless your interest rate is going to drop by at least 1.5 points, it doesn’t make sense to go ahead with it.
  6. Increased Financial Risk. Your first mortgage is considered to be a “non-recourse loan,” meaning that if you default on your payment, the most you can lose is your house. Even if the sale of the house doesn’t cover your loan, the bank can’t come after any of your other assets. But, in some states, a mortgage refinance is a recourse loan. If you live in one of those states and default, you not only stand to lose your home – you may also lose other assets as well.
  7. Prepayment Penalties. Your original loan might have a prepayment penalty if you pay it off in a certain number of years. Refinancing means paying off the old loan. So if you have a penalty, you might end up paying more in the end.

So there’s a lot more to refinancing than you might think. Consider all of the factors before you decide if refinancing is right for you.

Divorced? Veteran? There are all kinds of life and employment issues that can (and should) inform your decision to refinance. If you're a servicemember, and have recently gone through a break-up, check out this handy guide to refinancing for folks in your situation.

Read more →

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