4 Reasons Against Mortgage Refinancing
Should you get a mortgage refinancing or not? In certain situations, it is a good idea to go for it. Some of the benefits of refinancing are lower interest rate, access to cash, locking in a low fixed rate, or shortening the loan term. However, there are times when it simply does not help you. Below are some reasons why mortgage refinancing may not be the decision for you at this time:
- Your mortgage has existed for a very long time. Have you paid most of it or not? If you have had your mortgage for a long time, chances are you have paid most of the interest already. Just stick with it and build your equity. With a refinance, the loan amortization process is restarted. This means you revert to paying more interest than principal and it just does not make sense.
- You have a significant prepayment penalty. Review the terms of your loan. There are some lenders that charge a prepayment penalty, which is a fee for paying off your loan early, even to refinance. This fee can be waived though, particularly if you are refinancing with the same lender. But if the prepayment penalty cannot be waived, make sure to factor it in when you do your break even calculations.
- You get more fees than savings. The objective of mortgage refinancing is to save your money. If you can lower your payments through this process, then it may be worth it. However, if you want to lower your payments and save money over time, it will only happen if the savings from the refinance outweight the costs. There will be fees and you better pay attention to them. Add up all the fees, figure out the break even point, and calculate your potential monthly savings with the lower payment. Divide the total fees by the monthly savings and that is the number of months before you will save more than you have spent.
- You are selling your home. The point is to hit your break even point. If you are planning on selling your home before you break even on the cost of refinance, then you are only wasting money by refinancing the loan. What is the point?
It can be tricky trying to figure out whether a mortgage refinancing is right for you or not. Take your time in analyzing the numbers and calculating savings against costs. Making an informed decision is your best bet in keeping your money inside your wallet.