When interest rates are low, many people’s thoughts turn to mortgage refinancing. In many cases, mortgage refinancing can be a good financial move. If you can get a lower interest rate, you can save money over the long term. In some cases, if you refinance to a longer loan term, you can reduce your monthly payments and save money in the short term. Depending on your financial situation and goals, either of these situations might be desirable.
However, mortgage refinancing isn’t for everyone. There are some situations that refinancing doesn’t make sense.
The Interest Rate Isn’t Low Enough
One of the main reasons that mortgage financing may not be a good idea is if the mortgage rate isn’t low enough to make it worth your while. The general rule of thumb is that a mortgage rate should be at least 1% lower than your current rate in order to be worth it.
Because mortgage refinancing is a new loan, keep in mind that you will have to pay loan fees and other costs. If the mortgage rate isn’t low enough, you might find that your savings do not balance out the expenses.
Another consideration is your credit score. If your credit is not good, you may not qualify for the best mortgage interest rate. As a result, you may not be offered a rate that is low enough to justify mortgage refinancing.
You Don’t Have Enough Equity
Some lenders may approve your for mortgage refinancing even if you have a little equity in your home, but you will end up paying the price. If you do not have at least 20% equity in your home, you may have to pay for Private Mortgage Insurance (PMI). PMI can be expensive, adding to your mortgage payments each month. If mortgage refinancing would put you over 80% of the market value of your home, it might be wise to hold off.
You Plan to Move Soon
If you plan to move in less than five years, refinancing may not be a good idea for you. You need time to build up equity, and the interest savings over a small amount of time may not offset the expenses associated with mortgage refinancing. Before you refinance, consider how much longer you plan to stay in your home.
Bottom Line of Refinancing
Mortgage refinancing can be a great way to save money on your home loan. However, you should run the numbers before making your final decision. Figure out whether your savings will be enough overcome the costs associated with originating a new mortgage. If the numbers don’t add up, consider that mortgage refinancing may not be right for you at this time.