Refinancing can be a positive decision for many homeowners because it can lower their monthly payment and save them money. But in spite of what you may have heard, refinancing is not for everyone, and there are many reasons why.
The problem is that so many homeowners focus on the money-saving aspect of refinancing that they fail to weigh the pros and cons of this decision for their particular financial situation. It is a good idea to consider all of the reasons why you shouldn’t refinance before making the final decision. Remember that financing fees vary from state to state and lender to lender.
Let’s take a look at some reasons why it may not be a good idea to refinance your home:
You plan on moving in the next few years. In order to break even from the closing costs of refinancing, it will take a year or two for your savings to exceed the costs. If you are thinking about moving in the next few years, it simply will not be worth it to refinance.
Your credit is less than ideal. You will more than likely find that your interest rate will be higher if you have a low credit score. Damaged credit from bankruptcy, a delinquent loan, or default can cause your interest rate skyrocket. Since minor credit infractions fall off your report within two years, refinancing is something you might consider at a later time.
You cannot afford the closing costs. The closing costs of refinancing can cost several thousand dollars, and if you cannot afford this, you might want to reconsider refinancing. You can pay the closing costs out of your pocket or pay a higher interest rate. Sometimes you can roll the costs directly into your loan, but you are actually paying interest on them the entire time you have the loan.
The long-term costs will be too high. If refinancing will hurt you in the long run, chances are good that it is a bad idea. If you refinance a 30-year mortgage that you have had many years, you could wind up paying a bigger monthly payment and the loan can cost you even more in the long run. Your savings on a long-term basis would be almost nonexistent.
You want to refinance for cash to pay off credit cards debt. While this may seem tempting for homeowners with equity in their homes, it is usually a bad idea, especially if you rack up the credit card debt all over again in the future.
Before you make the decision to refinance or not, you should definitely weigh the pros and cons. Every financial situation is different, and even though rates are extremely low right now, it doesn’t mean that every homeowner should refinance. Even if the cons outweigh the pros right now, there is a possibility that you can refinance at a later time down the road.
If you are considering refinancing, it is imperative that you know the value of your home. You can get a free home valuation report from Neighborhood IQ to find out your home’s worth to help you decide if refinancing is right for you or not.