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The Hidden Risks of Refinancing Your Mortgage

Chloe Sorvino



Refinancing a mortgage, if done right, can help you save thousands.

But whether you’re trying to consolidate debt or just save some money, there are hidden dangers that can drive up the costs. Take advantage of low interest rates, but know the options that could eliminate savings.

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1. High closing costs: Banks will likely tack closing costs on to your tab, as well as unnecessary charges like application fees and loan processing fees. Try to negotiate these down. Keep in mind that if you agree to pay off the closing costs with the mortgage, you’ll end up paying more because those payments will come with interest over time. But also watch out for banks looking to lure you with no closing costs, while hiking up a plan’s interest rate.

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2. Longer period to pay it off: Don’t just take the lower interest rate into consideration. If it’s over more time, it will likely cost the same as your current plan — or even more. If you can afford to knock a few years off your payment plan, while lowering your rate, the savings are big. Compare each cost with your current plan and know that refinancing typically costs 3 to 6 percent of the loan’s principal. If you aren’t saving enough, don’t take the plunge.

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3. Staying put: If you are considering moving soon or think you will outgrow your home, refinancing isn’t for you. If you move within a few years of refinancing, the savings likely won’t outweigh the closing costs, and that will make you less likely to want to move. Bottom line: Leave refinancing to homeowners who see themselves living in their property for years to come.

4. Losing some protection: Some states, like California, give home buyers an extra layer of protection so that banks can’t sue you if you go into foreclosure and can’t pay back the money you owe. If your original mortgage protected you, make sure your refinanced option does too, or you’ll be giving up financial security.

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