Calculating how much house you can afford is, for many of us, one of the toughest decisions we face in adulthood. How we finance that home can be just as challenging. In an ideal world, we would get it right the first time. But refinancing offers a chance to do it again — in many cases to lower the interest rate or payments, or to shorten the term.
While there is potential to save, refinancing is a complicated process and not the right decision for everyone. Check out why now may not be the time for you to refinance your home.
1. You Don’t Plan to Stay Long
It’s a good idea to figure out how long you plan to stay in your home and be honest with this prediction. If you hope to be moving before the “break-even” period, or number of months it will take to make up the costs of closing a new loan, refinancing is not for you. It’s best to run the numbers on a refinance and determine what the break-even point will be for you. Then you can compare this with your current life plans. Things may change but if you are pretty sure you will be moving soon, refinancing may cost you more than it will save you.
2. The Long-Term Costs Are Too High
If your budget is tight right now, it can be very tempting to lower a monthly fixed payment like your mortgage. But while refinancing to lower your monthly payments seems great, it can hurt you in the long run. Extending the length of your loan may free up more cash in your monthly budget but it can also lead to you paying more for your home in terms of interest.
On the other side, refinancing to shorten the mortgage length can help you pay off your home faster but isn’t smart if it increases your monthly payments to more than you can comfortably afford. Be sure to calculate the long-term cost of a new mortgage and focus on more than just the monthly costs before making a final decision.
3. You Can’t Afford the Closing Costs
Refinancing always has a price tag — either through closing costs or a higher interest rate moving forward. While some lenders allow closing costs to roll into the loan, this just means you are paying even more interest for the same principal you were already paying off. If you cannot afford to pay the closing costs upfront, refinancing probably isn’t for you.
Replacing an existing loan with a new one can be beneficial, but clearly involves its drawbacks as well. Refinancing can cost between 3% and 6% of the loan’s principal and a headache-inducing amount of paperwork. The best way to decide whether to refinance your home is figuring out how much you will save and how much the process will cost in fees.
It’s important to remember that when you refinance your mortgage, you will have your credit scores checked by the lender. If you want to know where your credit stands, you can see two of your scores for free and get a personalized action plan for improving your credit on Credit.com.
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