When is Refinancing Your Mortgage a Bad Idea? | Mortgages and Advice

If you’re looking for ways to lower your monthly mortgage payments or tap into the equity in your home, you may be considering refinancing. Refinancing your mortgage has many benefits, but there are trade-offs to consider first. Before you move forward, take the time to consider whether refinancing will really benefit you financially.

When you refinance, you replace your current mortgage with a new home loan. Many people refinance to take advantage of lower interest rates and reduce their mortgage costs.

If you currently have a 15-year mortgage, you can refinance to extend your loan terms and lower your monthly payments. Extending your loan terms will increase the amount you pay overall but will lower your monthly mortgage payments.

You can also do a cash-out refinance, which involves borrowing from the equity you’ve built in your home. To do this, you’ll refinance your home for more than you currently owe on the mortgage and receive the difference in cash. You might use these funds to finance a home improvement project or pay down high-interest credit card debt.

Refinancing comes with many benefits, but it isn’t the best solution for everyone. Whether it makes sense for you depends on your financial goals and the current economic conditions. Let’s look at three scenarios where refinancing may be a bad idea.

Melissa Cohn, executive mortgage banker at William Raveis Mortgage in New York City, says you shouldn’t refinance unless you can secure an interest rate that’s 0.75% lower than your current rate. If your new interest rate will be higher than what you already have, refinancing probably isn’t a good choice because it’ll cost you more over the life of the loan.

Even if interest rates are low, refinancing isn’t a good idea if you plan to move in the next couple of years. That’s because if you move, it’ll take you too long to break even on the costs that come with refinancing.

“There are closing costs associated with refinancing, so you need to take that into account. If you refinance to a new 30-year loan after you have had a mortgage for a few years, you are starting all over again with the amortization of the mortgage,” says Cohn.

If you’re concerned about losing your job or your income fluctuates from month to month, refinancing probably isn’t a good idea. Refinancing is best for borrowers who are in a stable financial situation.

You won’t immediately save money by refinancing since you’ll have to come up with closing costs. And if you refinance to shorter loan terms, this could stretch your budget and unnecessarily put your home at risk.

Most people refinance to save money, so it can be a shock to end up spending between 3% to 6% of your total loan amount on closing costs. That means if you’re taking out a $400,000 mortgage, you could end up paying between $12,000 and $24,000 in closing costs.

Refinancing costs vary depending on the lender, but the closing costs typically include things like an application fee, origination fee, inspection fee and an attorney review fee. And some lenders may charge a prepayment penalty since you’re paying off the old loan early.

“Refinancing costs money, and in many cases, it can add up to a substantial amount,” says money coach and certified financial planner Ohan Kayikchyan. If your primary objective is to save money, he recommends taking the following steps before refinancing: