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Reasons to NOT Refinance Your Home Loan
Mortgage refinancing transactions have been on the rise as interest rates dribble to generational lows. However, that doesn't mean everybody should join the party.
"Out of every 10 enquiries I get on refinancing, probably three of them really shouldn't refinance," said mortgage broker J.J. Sims, owner of ABC Mortgage in Minneapolis and a member of the National Association of Mortgage Brokers' board of directors. "A lot of people get caught up in the hype of lower interest rates and don't really think it through."
The most obvious case of when refinancing doesn't make sense is when the homeowner doesn't plan to live in the house long enough for the savings from a refinancing to outweigh the costs of getting a loan. (I'll tell you exactly how to figure that out below.)
Any of the following also can be red flags:
• Have you been with the current mortgage for an extended period of time? </b>If you're 10 or 20 years into a 30-year mortgage, refinancing to another 30-year loan may only increase your costs in the long run.
• Is your credit worse than the last time you attained your mortgage? </b>If you've missed payments, ran up big credit-card debts or otherwise stressed your credit limit, you may not qualify for a low enough rate for refinancing to even make sense.
• Have you already stripped all the equity out of your home? </b>To get the best rates, you'll need to keep your borrowing to less than 80% of the value of your home. Refinancing might not make sense if you've already borrowed 90% or more of your home's value in mortgages and home equity loans.
• Do you have a spending problem?</b> Taking out extra cash during refinancing to pay off credit-card debts is a popular tactic these days - and a potentially huge mistake. You've turned what should be short-term debt into long-term debt, which can cost you more in the long run despite the tax advantages of being able to write off the interest. You've also put your home at greater risk and compromised your financial situation should you ever need to declare bankruptcy.