Since mortgage rates are at all-time lows, refinancing should be a no-brainer for just about everyone—or so you would think.
But not everyone has refinanced or even will.
Are there times or situations where refinancing isn’t worth doing, even to get lower rates? There are at least a few, and here are some of them.
7 Reasons You Shouldn’t Refinance Your Mortgage
1. When you have credit problems
A few years ago, you’d be able to refinance your home even if you had bad credit.
Your rate would have been adjusted higher due to the credit issues, but you would have been able to complete your refinance.
Today, you might get a loan if your credit is slightly impaired, and at that you’ll pay a higher rate. But if it’s anything worse then that a refinance will be out of the question.
You may have an option under some sort of streamline refinance where the lender only looks at your recent mortgage payment history. But if you’ve had a couple of late mortgage payments in the past year, that option will likely be out as well.
2. Closing costs exceed the benefit of a lower payment
Closing costs for a mortgage can amount to several thousand dollars, and this can sometimes call the wisdom of a refinance into question.
This is especially true if your loan is small, say under $50,000. Paying $3,000 or $4,000 in closing costs to lower the payment on your loan by one percent probably won’t be worth the cost.
Closing costs are usually handled in one of two ways, either they’re added to the new loan balance, or you pay them out of pocket. If you were to add the closing costs to a small mortgage, you’d be adding a substantial amount of principal to the new loan. If you were to pay it out of pocket, it would take years to recover the costs through lower payments.
3. Mortgage has only a few years left
If you have less than ten years to go on your mortgage, you might be better off to leave the loan as it is and continue to pay it off. Any money you would pay for closing costs under a refinance could instead be paid toward the existing loan to pay it off sooner.
Much will depend on how much you’ll save on the rate too. If you can drop your rate by at least two points it might still be worth refinancing on a short term loan. But on a single point drop—probably not.
4. Rates don’t justify a refinance
Some people have become serial refinancers, refinancing their loans at every drop of interest rates.
If you have a 4.50% rate, and rates have fallen to 3.75%, it may not be worth paying several thousand dollars in closing costs to get it.
5. Your income can’t be verified
Like mortgages for the credit impaired, it’s close to impossible to get any sort of mortgage without having to verify your income.
Until about five years ago it was quite common to get a mortgage without any income verification, and if that’s how you bought your home, you won’t be able to do again with a refinance. Lenders want to know your income now. Believe me, they will go through your records with a fine tooth comb making sure everything is in order.
Once again, a streamline refinance may offer some hope (but not always). Streamline refinances are mortgages you take with the same lender, and if you’ve been making your house payments on time, a new loan at a lower rate may be granted without all of the traditional loan documentation requirements.
Some of these programs may allow you to do a refinance without verifying income, but if you do, it will usually be strictly a rate and term refinance. You won’t be able to take out additional cash, nor will you be able to consolidate a second mortgage into the new loan.
6. You don’t plan on staying in the house
If you’re pretty certain that you won’t be in the house two or three years from now you probably don’t want to refinance.
The primary benefit of refinancing is in the years of savings you get from a lower interest rate. After two or three years you’ll roughly break even. That probably isn’t worth paying several thousand dollars in closing costs for.
7. Insufficient equity
This is a problem for a lot of homeowners today.
It’s not just the problem of being underwater on your mortgage (owing more than the house is worth) but also of diminished equity. If your loan was 80% of the purchase price of the home when you bought it, and declines in property values have caused the loan to now be 90% of the value, you’re looking at a different loan situation. Now you will need private mortgage insurance, and that will remove much or all of the benefit that a lower rate will bring.
There are programs that will allow you to refinance your mortgage without mortgage insurance, even if you have less than 20% equity. But many of those programs depend on your circumstances, such as income level or being in a distressed situation.
Related: If you still think a mortgage refinance is for you then check out local rates.]
Finally
As you can see, refinancing doesn’t work for everyone despite what look to be obvious benefits. Don’t think you have to refinance because rates are low. Make sure you understand your circumstances before you jump into a mortgage refinance.
Sometimes you just shouldn’t refinance your mortgage!
There are amortization tools on various websites or macros that you can use within Excel that you can plug your current mortgage in as well as a mortgage based on new numbers. This would show you how long it would take before you’d ‘make up’ the closing costs and such.
#2 and #4 are the main reasons I don’t refinance. I got my loan last year at 4.625% but only owe 62,000 so refinancing to save 1% isn’t going to be worth the thousands in closing costs for me. Now if I had a 250,000 it may be a different story.
Much thanks for the reference to my recent article.
It’s interesting to look at some of the deals that offer no points, no closing costs. In this case, it’s strictly a look at the rate, and if it’s even 1/8% lower, just take that new mortgage but send the amount of the old monthly payment and you’ll end your mortgage sooner.
I’ve talked to folk who had <10 years to go, but had a rate that was over 7%. A no cost refi down to 5% (which is high compared to what you can get with other fees) saved them 2%/ year on the years they had left. Remember, even with just 10 years to go on the 30 year loan, over 50% of the balance remains.
Great article!
Though there are true no cost loans out there man of them have other fees tacked in there in some shape or form.
But you’re example is good. If you have a high rate and can qualify for a much lower rate, even without a lot of time left then it may be worth it. You just need to make sure you aren’t extending the time of your mortgage.
Just a couple notes… I don’t think you mentioned that it is possible to do a ” no cost” refinance in which you take a higher than market rate to receive a lender credit that pays for all your closing costs. This can make sense in the situation where the homeowner isn’t going to live in the home for much longer but could still benefit from a lower rate.
Also, regarding homeowners that noonger have a 20% equity position; the HARP program does not have income limits and homeowners do not have to be ” distressed” to be able to refinance under this program, which allows borrowers to refinance without 20% equity, and not pay mortgage insurance.
We just tried to refinance because or interest rate is 6.5% but our debt/equity ratio is right around 1:1.
I wish I was able to refinance our house. Our house is underwater and I can’t even refinance..
I definitely agree with you. It is not advisable to refinance your mortgage when you have a not-so-good credit standing. A friend applied for refinancing a few months ago because he was having difficulty paying his mortgage as his credit card debt is accumulating and cannot keep up with the payment. He was approved for refinancing; however, it turned out that the ammortization from refinancing is higher than the current rate.
If you don’t want to do all the extra work. Kidding, but sometimes people use “not wanting to do the research” as a reason.
It’s lazy but it’s honest at least. If you aren’t going to look into the details then you can find yourself in a deal that may actually be worse.
I was a #6 girl for the last few years, I hated watching the sub 3% 15 year rates with me up near 5% but Closing costs would have made it a zero sum gain. (or close to it). Now rates better not rise before the first of the year as I’m finally moving.