During the recent economic turmoil, many homeowners chose to refinance their mortgages. Some wanted to lower their monthly payment, while others want to eliminate the Private Mortgage Insurance (PMI) they were having to pay each month. Some refinance to take advantage of lower interest rates.
Generally speaking, however, homeowners usually feel that by refinancing, they’ll have extra money left over each month to do the things they want to do.
But refinancing might not always be the best idea. Though it provides short-term relief, some homebuyers may find themselves regretting the decision a few years down the road. Here are a few reasons refinancing may not be the best idea for you at this time.
High fees may cut into your savings
Refinancing requires homeowners to pay closing costs and other potential fees you may not recoup, especially if you plan to move soon. You should stay long enough at least to save as much as the amount you paid in fees.
Zillow has a cost calculator that can help you determine how much refinancing can save you, based on your current loan amount, the interest rate, and other factors. The calculator also helps you figure out how much you’ll pay in fees and how long you’ll have to stay in your house to break even.
You’ll delay paying on the principal
In the first few years of a mortgage, a large chunk of the borrower’s monthly payment goes toward payment of interest. After a few years, an increasing amount of those payments goes toward the loan itself, and reduces the amount the homeowner owes.
This comes into play whether the borrower plans to sell the house or live there until it’s paid off. When the house goes up for sale, the homeowner will have a harder time recouping what he or she owes on the loan, especially since home values are still improving only sluggishly in many parts of the country.
Before refinancing, a homeowner should look at the current mortgage and note how quickly it will be paid down if he or she continues to pay at the current rate.
Your savings might be too small
If you live in a half-a-million-dollar house, you can probably net a fairly sizable savings each month by refinancing. But if you’re like many people, and the amount remaining on your original mortgage hovers around the $100,000 level, your savings may be much less significant on a monthly basis.
When compared to the fees you’ll be required to pay, combined with the time you’ll have to take out of your busy schedule to deal with the paperwork, you may well find you’re losing money on the deal.
Each homeowner must make an individual decision whether to refinance or not. Based on the variables mentioned above, a mortgage-holder may decide to delay refinancing until he or she knows more about the immediate future of the real estate market.
But for some, refinancing can still be a great way to cut down on monthly expenses while continuing to make payments on what is usually one’s biggest financial asset.