Home mortgage rates are near historical lows and despite rising more than a full percentage point this summer, have started dropping again this week. Refinancing while rates are low can potentially save you big bucks but it’s not always the right move. Before you call up your mortgage lender, SmartAsset has a few reasons why you might want to put your refinance plans on hold.
1. You’re Not Planning on Staying Put
One of the most important details you need to pay attention to when you’re planning to refinance is the break-even point. This is the amount of time it will take for you to recover the closing costs on the new loan. The break-even point is calculated based on how much you pay in closing costs and what your new interest rate will be.
Typically, closing costs average between 2 and 5 percent so it could take several years for you to get back to even. For example, if you pay $3,000 in closing costs and your payment only drops by $50 a month, it’ll take 60 months before you break even. If you’re planning on moving before the break-even period ends, refinancing probably doesn’t make much sense since you won’t be reaping any significant financial benefits in the long run.
2. Your Credit’s Not That Great
Your credit score plays a major part in determining what type of refinance rate you’ll qualify for. The higher your score, the better the deal will be. If your credit is less than stellar, you may have trouble finding a lender who’ll be willing to work with you on a refinance. If you are able to qualify for a loan, the rate might not be that great.
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With rates so low, it can be tempting to take what the lender is offering even if the savings you’ll see are small. If you’re feeling the pressure to refinance, just keep in mind that the Federal Reserve has said it will hold off on increasing interest rates until 2015. Waiting until your credit score improves even just a few points could make a big difference when it comes to the type of rate you can get.
3. You Can’t Afford the Closing Costs
Refinancing can save you money and even help you pay your loan off faster but it does you no good if you don’t have enough money on hand to cover the closing costs. If you can’t pony up the cash up front, you may be able to roll the closing costs over into your loan but there are some drawbacks.
Even if your closing costs are relatively low, adding them into the loan can tack on several thousand dollars to your mortgage. Not only are you taking a bite out of your equity, you’re potentially making your monthly payments higher. Over the long term, adding the closing costs to your mortgage can eat away at any savings you’d get from refinancing. If you can’t afford to pay the closing costs before you sign on the dotted line, it might be better to put the refinance on the backburner until you can save up the cash.
4. The Long-Term Costs Outweigh Your Savings
Refinancing doesn’t necessarily guarantee that you’ll save money and in some cases, it could actually work against you. For example, if you’ve already been paying on your existing loan for a while, you’ve probably paid more towards the interest than the principal. If you refinance into a 30-year loan to get a lower payment, you’re effectively going to be paying the interest twice even if it’s at a much lower rate the second time around.
Refinancing into a 15- or 20-year loan shortens your repayment period but it also means you’ll be paying more every month towards your mortgage. While a higher payment may be affordable now, you need to consider whether it will still be reasonable in the future. Even though you’ll be paying your loan off faster, you need to be able to sustain the pace if your financial situation changes.
5. You Want to Tap Into Your Home’s Equity
There are certain situations where it may seem like tapping into your home equity is a smart money move. For example, you could use the cash to consolidate your debts at a lower rate, finance some major home improvement projects, start a business or help your kids cover the cost of a college education.
Unless you know you’ll be able to cover your mortgage payments in the long term, you might be better off leaving your equity alone. Cashing out your equity can put money in your pocket but you run the risk of losing your home if you can’t keep up with your loan payments.
When you’re thinking of refinancing, you need to crunch all the numbers before you finalize a deal. If the math doesn’t quite add up to the savings you expected, it may be a sign that you’re not ready to refinance.
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