Most financial advisors will tell you to refinance your mortgage if you can lower your rate by as little 1%. The idea is that the lower rate will lead to lower payments, making your mortgage more manageable.
But that’s not always a good idea.
Because sometimes lowering your payments doesn’t really benefit your overall finances. In fact, there are many times refinancing your mortgage will actually cost you more.
Before you try to refi, make sure you know all of the costs associated with your new loan. That way you’ll be able to tell when you’ll break even – when the monthly payment savings offset the costs and expenses of your new loan.
Here are some reasons refinancing your mortgage may not make good financial sense.
- Your current mortgage comes with a steep prepayment penalty, which could mean it will cost you thousands of dollars to pay off that loan when you refinance.
- High closing costs (and, yes, refinances come with many of the same closing costs as your original mortgage) can make it take longer to break even on your refinance, making it a bad deal if you’re not planning on moving before the break-even date.
- If your credit score has decreased since you got your current mortgage, you many not qualify for the best rates, so it makes sense to wait and work on improving your score.
- When you have less than 20% equity in your home, you probably won’t be eligible for the most favorable refinancing terms, and you’ll be required to pay private mortgage insurance – PMI – which increases the monthly payment.
Whatever your situation, make sure to use an online mortgage refinance calculator to figure out how much you’ll save every month, your total savings over the life of the loan, and your break-even date (when those savings will finally outweigh all of your refinancing costs). And only refinance if all of the results fit in with your overall financial plans.