6 reasons why refinancing your mortgage is a bad idea
Homeowners are considering refinancing their mortgage for a number of reasons. Some are in a hurry to refinance to lock in lower interest rates, while others refinance to get rid of private mortgage insurance for a lower payment or use their home equity to consolidate debt.
Since mortgage rates are still historically low, refinancing your home can make a lot of financial sense to get a better rate and a better term. Recently, the 30-year average fixed mortgage interest rate has hovered below 3%, according to Freddie Mac. If you are considering refinancing your home, you can explore your mortgage refinancing options by visit Credible to compare rates and mortgage lenders.
However, for some mortgage borrowers, refinancing can be a bad idea. Read on to find out when it’s a bad idea, to avoid making a potential mistake.
1. Bad credit or credit score
If your credit score has gone down since applying for your first mortgage, your mortgage refinance rate could end up being higher than your current mortgage rate. Additionally, if your credit score has gotten too low, you may not meet the minimum credit score requirements for a loan refinance.
For example, if you have a Freddie Mac or Fannie Mae loan, the minimum credit score required for some mortgages is 620.
2. Cost of fees
Similar to taking out your initial mortgage, mortgage refinancing sometimes comes with closing costs. These closing costs can apply to various types of mortgages such as VA loans, FHA loans, or USDA loans. Although closing costs typically range between 2% and 5%, the amount you will pay depends on the lender.
For example, if your closing costs are 5% on a $ 120,000 mortgage, you will have to pay $ 6,000. Depending on your financial situation, this may be unaffordable for you, especially if it means draining your emergency fund.
3. You will be moving soon
If you plan to sell your home soon, the short-term costs of refinancing may outweigh the benefits, such as a lower interest rate. The longer you stay in your home, the more likely you are to break even. This is when the savings from refinancing your mortgage offset the cost of the fees.
4. Your new monthly payments will be too high
Changing the term of your loan could save you money with a lower interest rate, but could increase your mortgage payment. To save maximum interest, some homeowners choose to refinance their 30-year fixed mortgage into a 15-year fixed mortgage. This can halve the amount of interest you pay over the life of your mortgage. However, it can also double your monthly mortgage payments.
If you can’t pay the new monthly mortgage payment on your home loan, it increases the risk that the lender will foreclose on your home. Before refinancing into a short-term loan, use a online mortgage calculator to determine your new monthly fees. This way you will know if the new costs match your budget.
5. Debt consolidation
If you are refinancing your mortgage for the purpose of debt consolidation, you can perform a cash-out refinancing. This involves taking out a new, larger loan to tap into the equity in your existing home. Your lender will pay you the difference between the greater amount of the loan and your existing mortgage in cash.
While this can save you money, it does come with risks. For example, if you have a hard time paying off a larger loan or defaulting on your payments, it can destroy your credit and you can lose your home.
6. Your mortgage rates are always good
If your refinance rate is comparable to current mortgage rates, you might not save much by choosing to refinance your mortgage. Before refinancing your mortgage, compare your current mortgage rate with the average interest rate.
In early June, the average mortgage rate on a 30-year fixed-rate mortgage was still just under 3%.
Over the past month, mortgage rates have trended downward. To check if today’s rates are lower than your current rate, visit Credible to compare the rates of several mortgage refinance lenders at once.
The bottom line
While some homeowners can save a lot of money by refinancing their mortgage, that doesn’t mean it’s a good idea for all homeowners. Refinancing your mortgage can be a bad idea if you have a bad credit rating, can’t afford fees or new monthly payments, or if you don’t stay in your home long enough to reap the benefits.
Before you refinance your mortgage, take a look at your unique financial situation to see if it makes sense. If that is the case, Credible’s Fee Online Tool can help you easily compare multiple lenders and see prequalified rates in as little as three minutes.
Have a finance-related question, but don’t know who to ask? Email the Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert column.