Most people who choose to refinance their house don’t do it because they love filling out financial paperwork. They do it to save money. The hope is that by getting a better interest rate, home owners can lower their monthly payments and come out ahead. But that isn’t always the case, and sometimes the timing just isn’t right to refinance, even with historically low rates. Here are the top five reasons why it might not be worth it to refinance your mortgage right now, plus other refinancing problems you should avoid.
1. The Break-Even Point
This is perhaps the biggest trap home owners fall into when looking to refinance a house. The issue has to do with the closing costs you’ll need to pay to refinance your mortgage — appraisal fees, loan origination fees, title insurance and other legal fees. Yes, you’ll have to pay these closing costs just like you did when you bought your house, and again, they can be substantial. The average closing costs equal roughly 2-5% of the principal. So, the “break-even point” is the point at which you’ll recover that cost with your lower monthly mortgage payments.
For example, if refinancing saves you $100 per month but you have to spend $4,800 in closing costs, it will take you 48 months to break even. If you plan on moving in the next four years, it wouldn’t be worth it to refinance.
Many people fail to account for the break-even point, or their life plans change and they are compelled to move. That’s why it’s so important to understand your long-term housing vision before refinancing.
2. Can’t Afford Closing Costs
They say it takes money to make money. Well, when it comes to refinancing your house, it also takes money to save money. As we just illustrated, you’ll have to pay closing costs on your new mortgage and figure out the break-even point that makes refinancing worth it. But if you’d struggle to come up with the money to pay closing costs in the first place, refinancing may not be for you. Wait to refinance until you’ve saved up enough money to cover the closing costs without breaking the bank.
3. Lower Credit Scores Can Be Costly
If you want to refinance your house but don’t have the best credit score, you may want to wait until you can bring up your score. Having a lower credit score will likely mean you receive a higher interest rate on your mortgage. This cuts into the savings you hope to achieve by refinancing.
Credit scores change frequently and just because you had a score high enough to qualify for a home loan the first time around, doesn’t mean you have the necessary credit score to refinance. By bringing your score up even a few points before refinancing, you could save thousands of dollars in the long run.
4. Plans to Use Home’s Equity
With a cash-out home refinancing, you take out a loan that is larger than your existing loan. This allows you to access some of your home’s equity as cash. Some people do this to consolidate debt and use the cash to pay down things like credit card debt. But this can be risky because you are now tying that debt to your home. If you fail to make a payment on your mortgage, you risk foreclosure. The penalties for late credit card payments can cause big problems, but they usually don’t end with you living on the street. So think carefully before refinancing your house to pay down debt.
5. Lowering Payments May Not Save You Money
The goal in refinancing a home is to lower your monthly payment to save money. But just because you pay a little less each month doesn’t mean you’re saving money in the long run. If you refinance at a lower rate but extend the term of your loan, you could end up paying thousands more over the course of the loan.
For example, if you had $100,000 and 15 years left on your loan, but refinance for $100,000 on a 30-year term, you’ll end up paying more money in interest, despite a lower rate. When refinancing a house, you need to look at the big picture and do some math to figure out if it’s really worth it.
6. Other Mistakes to Avoid When Refinancing Your Mortgage
If you’ve reviewed this list and decided that now is the right time for you to refinance your home, congrats! We hope big savings are in your future. But there are still a number of potential refinancing mistakes you’ll need to avoid. For example, don’t just refinance with your current lender because they’re familiar. Interest rates can vary greatly between lenders. So take the time to shop around and find the best interest rate possible.
Also, make sure to lock in your mortgage rate when negotiating with your lender. Again, rates change quickly. So you need to lock in the rate during the refinancing approval process. Otherwise the rate can change and you could end up with a bad deal.
Another big mistake is leaving money on the table by not taking advantage of Homes for Heroes’ amazing deals. When you work with our mortgage specialists to refinance your home, you’ll save money on lending fees, title fees and more. There’s no obligation, and you could end up saving hundreds, if not thousands of dollars. If the whole point of home refinancing is to save money, why not save the most money possible with Homes for Heroes?
Ready to refinance your home mortgage? Register with Homes for Heroes today and get started on the path to big savings.