When Should you not Refinance?

Sometimes it’s not the best idea to refinance. Here’s when you should avoid it.

You’ve Had the Mortgage for a Long Time

When you refinance, you ‘restart’ your term. If you’ve paid down the mortgage balance for many years, you’re starting over from day one. At the start of a mortgage, you pay mostly interest, barely touching the principal. As you get to the mid and later parts of the term, you pay more principal. Restarting the amortization process won’t help you build equity and will cost you more in interest.

You’ll Move Soon

If you’ll move soon, paying the closing costs to refinance might not make sense. Weigh the savings, how long you’ll earn them and how much the refinance costs before refinancing. Usually, if you’ll move within the next couple of years, it doesn’t make sense. You’ll spend more on closing costs than you would earn in savings.
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You Have a Prepayment Penalty

Some loans charge a penalty if you pay it off early. This is how lenders guarantee they’ll make a specific amount of profit on the loan. There may be ways around it, especially if you refinance with the same lender, but always ask first.

If you pay a prepayment penalty, it adds to the closing costs. The more money it costs to refinance your loan, the longer it takes to break even or make back the amount paid in closing costs with the refinance savings.

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You Don’t Qualify

Just like when you took out your first mortgage, you must qualify for the refinance. If you have a lower credit score, excessive debts, or unstable income, you may get worse terms than you have now.

Even if you’re personally in a good qualifying position, your property may not be. If the home value fell in recent years, it may not be worth as much as you need to borrow. If you’re upside down (owe more than the home’s value), you don’t have many (or any) options to refinance. If you sell your house when you owe more than you’ll make on it, you’ll still owe the difference.