Here are some situations where refinancing might not make sense.
1. It Will Take You Too Long To Break Even
If you plan to refinance to a lower monthly payment, you might assume that you’ll immediately start saving money. But that isn’t necessarily the case.
To calculate your savings, you have to factor in how much you spent getting the loan and consider how long you plan to stay in the home. So, say you spent $8,000 on closing costs. Once you break even on that amount, you’ll have fully recouped the costs associated with getting the loan. After that, you’ll begin actually saving money.
It can take a while to reach this point. From our example above, say you spent $8,000 to refinance into a loan that saves you $100 each month. To figure out your break-even point, you’ll divide the total cost of the loan by your monthly savings.
8,000 ÷ 100 = 80
In this example, it will take 80 months, or over 6 years, to break even.
2. It Will Cost You More In The Long Run
Depending on the type of refinance you get, your new loan could end up costing you more money in the long run than if you’d just stuck with your original loan.
This can happen when you extend your loan term, because you’re lengthening the amount of time you’ll spend paying interest.
However, extending your loan term can come with a lot of benefits, especially if you’re having trouble keeping up with your current mortgage payment. Having a more manageable monthly payment may be worth the trade-off for some homeowners.
3. You Already Have A Low Fixed-Term Rate
If rates are lower than what your rate on your current mortgage is, it might seem like a no-brainer to refinance.
But if your rate is already relatively low and current rates aren’t significantly lower than yours, you might not end up saving as much money as you thought you would.
4. You Can’t Afford Your Closing Costs
Closing costs include things like appraisals, origination fees and other costs associated with preparing and closing on your loan.
As we mentioned above, these can cost between 2% – 6% of your loan amount, which is a significant chunk of money. If you don’t have enough cash, you might be tempted to roll your closing costs into your loan amount or take on a higher rate to avoid paying these costs upfront.
However, when you do this, you’re potentially cutting into the savings from your refinance because now you’re also paying interest on those costs.
5. You Plan To Move In A Few Years
There’s typically not much of a benefit to refinancing if you’re planning to sell soon.
Remember your break-even point? If you sell your home before you reach that point, you won’t fully recoup the money you spent getting your loan – to say nothing of the savings you could be missing out on.
6. Your Credit Score Is Low
If you have a lower score than you did when you were approved for your original mortgage, you could end up being offered less attractive terms on your refinance. This is also true for other aspects of your financial situation, such as if your debt-to-income ratio has increased.
7. A Higher Monthly Payment Will Stretch Your Budget
Sometimes, homeowners will refinance into a shorter-term loan to pay off their mortgage faster and reduce the amount they’ll pay in interest over the life of the loan. However, this can be risky since it typically locks you into a higher monthly payment.
The benefit of having a lower monthly payment is that it gives you more wiggle room if you encounter a period of financial difficulty or you have a month where your budget is tighter than usual.
If you want to pay off your loan faster but aren’t sure if refinancing into a shorter term would be a good move, it might make more sense to just make additional payments each month. That way, you have the flexibility to make larger payments when your budget allows for it and only pay your normal amount when you don’t have the extra cash.
Plus, even if you have the extra money in your budget to take on a higher monthly payment, you might decide that money could be better used elsewhere, such as saving for retirement or investing.
8. You’re Unnecessarily Risking Your Equity
A cash-out refinance allows you to tap into the equity you have in your home and convert it into cash. This can be especially useful for things like paying for a renovation project that boosts the value of your home or paying down a large amount of high-interest debt.
However, cash-out refinances aren’t always the best financing option, since you’re taking equity out of your home and creating extra debt that’s secured by your home.
If you’re considering a cash-out refinance, think about how you plan to use that money and whether it will help or hinder you financially. Cash-out refinances can be beneficial to homeowners, but it’s important to weigh the pros and cons before deciding whether it’s right for you.
9. You Haven’t Done The Math
Ultimately, whether or not a refinance makes sense for you comes down to math. Everyone’s situation is different, and the only way to know whether a refinance will help you meet your goals – whether that’s to lower your monthly payment, pay off your loan faster or save money on interest – is to do the math based on your individual numbers.
You can get started by plugging your numbers into our refinance calculator to see how much you could potentially save.
FAQs
Key Takeaways. Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.
What is not a good reason to refinance? ›
Key Takeaways. Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.
Why shouldn't you refinance your house? ›
The potential to lower your monthly payments, reduce your loan's overall interest and tap into your home's equity may be tempting. However, it's essential to factor in closing costs, the impact to your home's equity, and the possibility of extending your loan term. All are valid reasons to not refinance your home.
What are the negative effects of refinancing? ›
Refinancing allows you to lengthen your loan term if you're having trouble making your payments. The downsides are that you'll be paying off your mortgage longer and you'll pay more in interest over time. However, a longer loan term can make your monthly payments more affordable and free up extra cash.
At what point is it worth it to refinance? ›
Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance. Using a mortgage calculator is a good resource to budget some of the costs.
Is there a con to refinancing? ›
A longer-term loan could result in lower monthly payments, but higher overall costs. For instance, if you have 10 years left to pay on your current loan and you refinance to a 30-year loan, you could end up paying more in interest overall to borrow the money and have 20 extra years of mortgage payments.
What disqualifies a refinance? ›
In general, lenders expect you to have a minimum of 20% in home equity to refinance. In other words, the loan balance must be 80% or less of the home's value. If you don't have enough equity to meet the lender's requirement—especially if you want to take cash out of the home—you may not be eligible to refinance.
What do you lose when you refinance your home? ›
You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
Is refinancing a good idea right now? ›
You can't get a lower interest rate: If your goal is to reduce your interest costs, right now isn't the best time to refinance. You're likely to end up with a higher rate, plus you'll need to cover closing costs on your new mortgage.
Does refinancing hurt me? ›
Refinancing may temporarily lower your credit score a few points. Applying for a loan generates a hard inquiry, but many lenders offer prequalification to check your rates first. Refinancing may be worth it if rates have dropped or your credit score has improved since you took out your loan.
If rates are lower, or you think your credit rating may qualify you for a better interest rate than you received when you first got your mortgage, you may consider refinancing. A refinance is essentially getting a new mortgage to replace the one you currently have.
Why do I owe more after refinancing? ›
Cash-out refinance A cash-out refinance allows you to convert your home equity to cash in exchange for a higher loan balance. While you may not be changing your interest rate in this process, your monthly mortgage payment will be impacted by that increased principal amount.
Does a refinance hurt your credit? ›
Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.
How many years should you wait to refinance your home? ›
In most cases, you'll need to wait at least six months after buying a house before you can refinance. Some government-backed loans, such as FHA, VA, and USDA loans, may have different waiting periods ranging from 6-12 months.
How low will interest rates go in 2024? ›
The 30-year fixed mortgage rate is expected to fall to the mid-6% range through the end of 2024, potentially dipping into high-5% territory by the end of 2025. However, recent economic developments have led some forecasters to believe that rates will remain elevated at around 7% for the remainder of this year.
Do you end up paying more when you refinance? ›
Refinancing can lower your monthly payment, but it will often make the loan more expensive in the end if you're adding years to your mortgage. If you need to refinance to avoid losing your house, paying more, in the long run, might be worth it.
What not to do during refinance process? ›
Rushing in to the decision to refinance may not benefit your financial situation, so take time to avoid these eight mistakes.
- Failing to do your homework. ...
- Assuming you're getting the best deal. ...
- Failing to factor in all costs. ...
- Ignoring your credit score. ...
- Neglecting to determine your refinance breakeven point.
The bottom line
You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
Does refinancing hurt your credit? ›
In conclusion. Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months ...
Which of the following is a disadvantage to refinancing? ›
Final answer: Prepayment penalties can be a disadvantage to refinancing.
