These days, it seems like homeowners are refinancing their mortgages left and right. Of course, who can blame them? The word on the street is that refinancing can save people significant money each month on their mortgage payments. While that may be true for some people, it?s not true for everyone.
The main problem is that all we ever hear about refinancing is how great it is and how you?ll save tons of money if you do it. We never hear about the fees, the time commitment, and the fact that not everyone is a good fit for a refinance.
Read more to see if you should think twice about refinancing.
1. If Your Rate Won?t Drop More Than 1%. Really, it?s only worth it to refinance if you are going to save more than 1% (preferably more) on your interest rate. The reason is that (like most real estate transactions) there are all these different fees that you have to pay to refinance. May of these fees are 3-6% of your principal, so you?ll need to bust out the ol? calculator and see how long it will take you to recoup those fees and make the refinance worth it. Chances are that if you are dropping less than 1%, it?s not worth it at all.
Related: 6 Reasons You Shouldn?t Buy a House
2. You Can?t Get Help With Your Payments Right This Second. If you are having trouble making your monthly payments and are in danger of missing a payment, unfortunately there is no refinance fairy that can help you out and make the process quicker. Even the biggest banks take about 70 days for a refinance to go through, so if you need help with your payments, call your lender today to explain the issue and try to work something out. You have a better chance of getting them to agree to a missed payment than waiting on a refinance to go through. You can also search government-sponsored programs that help homeowners who are having trouble making their mortgage payments.
3. You Might Not Be Able to Keep Your Short Term Loan. Let?s say you have been diligently paying down your 15-year mortgage for the past 10 years. The interest rate is high at 7%, and you want to pay it off as quickly as possible, so you look into refinancing. Unfortunately, if you refinance, it is unlikely you will get a 5-year loan. The shortest you would be able to get is 10 years. You could definitely work hard and pay the loan off early, but you?d also be paying those pesky 3-6% fees to refinance, so it?s likely not worth it in this case since you could make an extra payment for the cost of the fees.
Related: 15 Hidden Costs Of Owning A Home
4. If You Are Moving Soon. By ?soon? I mean that refinancing might not be right for you even if you are moving two or three years from now. I hate to bring them up again, but this is all about those fees! Because the refinancing fees can be about 3-6% of your principal and the whole process is rather lengthy, it?s really not worth it if you are going to pack up the boxes and head off on another adventure in the near future.
5. If You Owe Less Than $100k. If you owe less than $100,000 on your mortgage, congratulations! You are a mortgage payoff rock star. Now that you are so close and can taste that sweet victory inches from you, you might be tempted to refinance. However, going through all the trouble to refinance + paying the fees will only save you about $80-$100 a month. While you can buy a lot of cookies with $100 a month, it?s better to put the money you would have spent on the fees towards an extra payment and just leave the loan as it is.
6. If You Hate Debt. If you hate debt as I do, you don?t want to be in this perpetual ring of debt fire with the financing and re-financing. The problem is that when you refinance, you are getting a brand new loan with brand new terms. This is also a tempting time for people to pull out equity for college funds or renovations, making the assumption that adding on a bathroom will make up for the extra money taken out. Yet, it?s all just one big debt cyclone, and you really can?t get out of it until you buckle down and make some extra payments.
7. If You Don?t Have The Time. As mentioned previously, refinancing your home is a lengthy process. For some people, it?s totally worth it, but for others it won?t be. The process itself can take on average 70 days, but that doesn?t include the time it takes to get quotes, talk to lenders, and try to find the best rates. If you are currently comfortable with your mortgage payment and have a good rate, you really need to think hard about if the time it takes to get a refinance is worth your while.
8. If Your Mortgage is Upside Down. Typically, refinancing requires that you have at least 20% equity in your home, so if you owe more than your home is worth, you might be ineligible for a traditional loan. However, you can look into many government-sponsored programs that are in place to help homeowners who are in this position.
Ultimately, when it comes to refinancing your home, the decision is yours. As evidenced from this post, though, it?s extremely important to get the entire picture and to ask your lender a lot of questions about the process. Remember that there could be hidden fees, lengthy contracts, and a long time frame to get the job done.
While refinancing is worth it for many people, and you?ll find tons of satisfied refinancers around the country, it?s important to be aware of all the negatives as well so that you can make a smart, savvy financial decision for yourself and for your future.