Top Three Reasons Not to Refinance Your Mortgage

Mortgage refinancing is meant to do one of two things: put cash in your pocket today or save you money tomorrow. In some cases, it can even do both. But refinancing your mortgage won’t always make you rich in the long run - in fact, some remortgages will actually cost you. Before you dive into a mortgage refinance, make sure you’re not making one of these top three mistakes.

Moving Out Before You Break Even

One of the biggest mistakes that homeowners make is refinancing for the long term but moving or refinancing again before they break even. For example, if you can refinance to save $100 a month on your payments, it will take you about 30 months to make up for the $3,000 in closing costs. If you stay in your home beyond those 30 months, then it’s all gravy from there. But if you decide to pick up and move after a year, then you’re essentially paying $3,000 in order to save $1,200.

Reducing Your Payments, Not Your Principle

Another attractive route for refinancing is to move to a mortgage with lower monthly payments, such as an interest-only mortgage, a variable mortgage or a longer term mortgage. However, your lower monthly payments may fail to chip away at the principle, and ten years from now, you could owe the same or more (i.e. negative amortization) as you did when you began. At this point, you may as well have been paying rent, since you’re not building equity - except now you have a $100,000 loan with nothing to show for it. We recommend running the numbers through our mortgage calculator to determine how you’ll fare down the road.

Refinancing Instead of Getting a Second Mortgage

Oftentimes, cashing out your home equity is the right move, but the homeowner chooses the wrong avenue for doing so. In some cases, a second mortgage or home equity line of credit (HELOC) are better choices, since they have lesser closing costs and allow you to repay the balance faster. Again, we strongly recommend crunching the numbers before making the leap.

Conclusion

Refinancing is a great way to achieve your financial goals, but it’s not the only option. Talk with a trusted mortgage broker or mortgage lender and ask them what is best for your situation. Then, do the math for best and worst case scenarios, get competing quotes and make a decision that makes the most financial sense to you. Avoid knee jerk reactions to marginally falling interest rates and recommendations from friends, neighbors and professionals that “now is the time to refinance!” Depending on your financial picture, it may be more prudent for you to get a home equity loan, take out a HELOC or simply pay down your mortgage. Bottom-line: explore all your options and do what adds up on paper.

Top Three Reasons Not to Refinance Your Mortgage

Moving Out Before You Break Even

Reducing Your Payments, Not Your Principle

Refinancing Instead of Getting a Second Mortgage

Conclusion

Related Blog Posts