Home mortgage refinance rates are still low in 2019, despite rising substantially last year.
If you can refinance your mortgage and save at least .5% on the rate, it can be a way to save you big bucks in interest and payments over the years.
But the decision to refinance should be carefully weighed. Below are five reasons you may want to hold off on that refinance.
#1 You Are Not Going to Stay
A major consideration when considering a refinance is the break-even point. This is the time it will take for you to recover your closing costs with the new first mortgage. The break even point is determined based upon how much your closing costs are and what the new rate will be.
Closing costs are usually between 2% and 5%. It may take you several years to get back what you paid in closing costs. For instance, say your closing costs are $3000 and your payment is reduced by $50 per month. It will take a full five years for you to break even. If you want to move before that five years is up, refinancing is probably not going to be a good choice for you.
Refinancing is best for those who intend to stay in the home for years.
#2 You Have Bad Credit
What your credit score is will play a major part in determining what your new rate will be. The higher your credit score, the better your rate. If you have average or poor credit, you probably will have a higher rate. You also could have difficulty finding a lender to work with you.
An exception is if you are doing an FHA refinance. Rates for these government-sponsored loans are generally lower than market and are not based upon personal credit.
#3 Closing Costs Are High
Refinancing can save you on interest and monthly payments. But it does not help you if you don’t have the cash on hand for your closing costs. If you cannot come up with the money up front, you could roll the closing costs into the new loan. But this choice comes with drawbacks.
Even if the closing costs are only 2%, adding them into your loan can add several thousand dollars to your home loan. You are taking a hit on your equity and you could make your monthly payments higher. Over the years, adding closing costs to your mortgage can reduce any savings that you enjoy from the refinance. If you are unable to pay closing costs before you sign the mortgage documents, you might want to hold off on the refinance.
#4 Long Term Costs Are More Than the Savings
Refinancing will not always guarantee that you will save money. In fact, it can work against you sometimes. If you have been paying on your mortgage for several years, you have probably been paying more interest than principal. If you do a refinance into a 30-year loan to get a lower payment, you are going to be paying interest two times, even if it is at a lower rate.
Refinancing your loan into a 15-year note will shorten the repayment period, but it means you pay more each month. A higher payment could be doable now, but you have to think about if you can afford it in a few years. What if your financial situation changes? That 30% higher payment could come back to bite you on a 15-year loan.
#5 You Want to Take Out Equity
Sometimes taking out home equity is a good idea. You could use the cash to finance home improvements, start a business, or pay for college.
But unless you are confident that you will be able to pay your mortgage over the long term, you could be better off leaving your equity where it is. Cashing out equity can put more money in your pocket, but you could lose your home if you can’t make the payments.
You should crunch the numbers with care when you are thinking about refinancing to find out if it is a good move or not.