There are a lot of good reasons to refinance your mortgage,
especially with rates as low as they are. But at the same time,
there can be some pretty good reasons not to refinance as well.
Many borrowers get so focused on the possibility of saving money
that they neglect to consider the potential downsides of
refinancing. But they definitely exist, and you want to take them
into consideration before taking the plunge.
Here are five of the main reasons not to refinance your
mortgage, or at least, not to refinance quite yet.
1 - You won't be in the home long enough
A big consideration in refinancing is the "break-even point,"
the point when your savings from refinancing exceed your closing
costs for the loan. Since closing costs on a refinance typically
range from about 2-4 percent of the loan balance, it's going to
take a few years to recoup that from a savings of half a percent on
your loan.
Think about it: If you pay $4,000 to refinance a $200,000
mortgage and your half-percent reduction only saves you $60 a
month, it's going to take you 66 months - five and a half years -
to break even. And that's with only 2 percent in closing costs. If
your closing costs were percent closing costs, it would take you
more than eight years. So if you're planning to move before then,
it's just not worth it.
2 - Closing costs too high
This is pretty similar to #1. You may have a chance to
significantly reduce your mortgage rate, or perhaps pay your loan
off faster, but the closing costs are too high for you to pay out
of pocket. You might be able to roll them into the loan amount, but
that might boost your payments enough to make refinancing less
attractive.
As mentioned above, the cost to refinance a mortgage usually
runs from 2-4 percent of the loan amount, sometimes even more,
particularly if you buy discount points. If you roll that into the
loan amount, that's adding thousands of dollars onto your mortgage,
reducing your home equity. Otherwise, it's money right out of your
pocket. You have to decide if the eventual savings or shorter loan
term is worth it.
3 - Damaged credit
If your credit is less than ideal - say, a FICO score in the
upper 600s - you may find that while you can find a lender who will
refinance your mortgage, the interest rate you can get is much less
attractive than what's being offered to borrowers with higher
credit scores.
In the current mortgage environment, the temptation can be
strong to just bite the bullet and take the rate you can get. After
all, mortgage rates are incredibly low right now and you don't want
to miss out on that, even if you're not getting the best rate
possible.
However, unless you have a major blemish on your credit like a
bankruptcy, default or seriously delinquent loan (more than 90 days
past due), you may be able to improve your credit faster than you
think. Most of the effects of minor credit infractions fall off
your report within two years, so you may be able to get a better
rate then. The Fed has indicated it wants to keep rates low through
at least 2015, so if you're in this situation, waiting to refinance
is something you may want to consider.
4 - Shortening your term too much
With rates on 15-year mortgages as low as they are, there's a
great temptation for many borrowers to try to cram what's left of a
30-year mortgage into a 15-year payoff. While this can save a ton
of money over the long term, it can also cause some pretty heavy
financial stress in the meantime.
Paying an extra couple hundred dollars a month more may not seem
like much, but you're going to be doing that for 15 years - and you
can't scale it back if you hit a tight spot. What are your finances
like currently? Can you spare that much cash every month on a
long-term basis? You want to make sure the answer is yes before you
go about shortening up your mortgage term too much.
5- Extending your term
Lengthening the term of your mortgage is another possibility.
Since the "standard" residential mortgage is a 30-year fixed-rate
loan, it's very easy to simply refinance back into one of those,
even if you've already paid off five years or more of your old one.
You get a reduced rate and because the loan amount is smaller than
the original mortgage, you can see a hefty reduction in your
monthly payment.
The problem is that this can cost you over the long term. Yes,
you're reducing your monthly payment, but you're also extending the
time it will take to pay off the loan. That longer term also means
that much of your savings can get eaten up by compounded
interest.
A better approach is to take out a 30-year loan but ask your
loan officer to set your payments on a schedule where you'll still
pay it off in 25 years or however much time is left on your current
mortgage. That way, you'll still get a nice reduction in your
mortgage payments but will still keep your original payoff
date.
First published on MortgageLoan.com at:
http://www.mortgageloan.com/five-good-reasons-not-refinance-9266