5 Signs You Should NOT Refinance Your Mortgage
Introduction
Mortgage refinancing is a process where you get a new mortgage to service a previous one. The main incentives for mortgage refinancing are better interest rates and terms.
Refinancing allows you to pay off an existing mortgage in its entirety and begin servicing a new, less financially demanding one.
If you have a good credit rating, you can perform mortgage refinancing so as to move from a variable loan rate to a fixed one while enjoying a lower interest rate.
Despite the attractive features of mortgage refinancing, it is not always a suitable solution. Here are 5 signs you should NOT refinance your mortgage.
You do not plan to live in your house
You should not refinance your house if you do not plan to live in it for longer than the next five years. That’s because the process will only waste your time and money.
If you sell your home in less than half a decade, you will not be able to enjoy the benefits brought about by low interest rates.
Furthermore, you will still owe the fees which are associated with the new loan that you took out. As such, ask yourself how long you desire to live in the house whose mortgage you want to refinance. If you don’t want to stay there for long, do not go through with the process.
There is nothing saved after mortgage refinancing
Many people refinance their mortgages because they want to enjoy lower interest rates. However, this does not always happen.
The process of mortgage refinancing will cost you some money compared to how much you will be able to save. Furthermore, it is important to note that mortgage refinancing can add a number of years to your loan.
As such, you may not be saving anything on your monthly payments if the loan term is extended by five years.
You desperately want to pay off your mortgage loan sooner
During refinancing, many people normally reduce the term period. For example, they choose a 15 year term from the 30 year term that they had on the old mortgage.
Despite making calculations and finding that the reduction will only cause a mild increase in monthly payments, this can be a risky move to make.
The extra money that you have to pay after refinancing your mortgage can reduce your cash at hand. As such, you may struggle a lot more if any emergency costs emerge.
A shift to an ARM is inevitable
For you to experience a meaningful reduction in interest rate after refinancing your mortgage, you would have to move from a fixed-rate to an Adjustable Rate Mortgage (ARM).
Fixed rate mortgages offer low interest rates of only up to 4.5%. However, ARM can offer you interest rates which are as low as 2.75%. As such, if you want to experience real savings on interest rates, you would have to move to the ARM.
Unfortunately, the rate quoted by the ARM right now can increase significantly in the next few years depending on the performance of the housing market.
It can even surpass the rates quoted by fixed rate mortgages and render you homeless. Therefore, if you desire very large savings on interest and do not want to move to the ARM, do not refinance your house.
You can’t afford the closing costs
For you to move right out of an old mortgage and into a new one, you have to pay some closing costs which can run up to thousands of dollars.
You can pay these costs out of your pocket. If you do not have the cash at hand, they can be rolled into your new mortgage loan and increase the interest rate for the first few years.
Overall, you cannot avoid these closing costs. Should they be rolled into your new mortgage loan, they eliminate the benefit that you desired in the first place.
Conclusion
Mortgage refinancing is an effective way to get lower interest rates. However, it is not always a great idea. If you observe the above signs in your refinancing process, do not go through with it.