Thinking About Refinancing Your Mortgage? Read This First

holding piggy bank and model house in hands

When interest rates took a nosedive a few years ago, it made sense to refinance your mortgage. And rightly so — cutting two percentage points off your interest rate could save you a lot of cash! But what about now? You keep hearing that mortgage rates are still quite low, but is refinancing your mortgage still a good deal? It’s a great question, but there are several things that you should consider before signing on to a lower rate.

If you’re planning on selling the house within just a few years, you might want to reconsider the idea of refinancing.  When you refinance, you pay off your existing loan and get a completely new one. And along with that new loan comes closing costs and fees that you typically have to pay. (In some cases, a lender may agree to pay these costs for you but this typically means you’ll either pay a higher interest rate or the fees will be rolled into the total amount of the loan.) If you plan on staking a “for sale” sign in your front yard in just a year or two, you probably won’t recoup this money.

The answer is also no if your home has drastically depreciated since you received your existing mortgage. If your property’s value is less than the amount outstanding on your current mortgage, it will be difficult to find a lender that’s willing to give you a new one. That’s because, in case you default on your loan, financial institutions don’t want to assume ownership of a property that’s underwater. In this situation, it’s probably not worth your time trying to refinance.

Refinancing might also not be worth it if you’ve been paying on your mortgage for a substantial amount of time. If you have a 30-year loan and you already made, say 15 years’ worth of payments, you’re half way to a house-payment-free life. But if you refinance and get another 30-year loan, you’ll be starting all over again. And depending upon both the original and new interest rates, you could end up paying more in interest charges. In this situation, you should only refinance if you’re going to get a loan with a shorter time frame, like 10-year or 15-year mortgage. And then, only if the numbers mesh and you’re saving on the refi.

The same holds true if you’ve had any financial setbacks in recent years that had a negative impact on your credit scores. In order to protect themselves from potential risk, lenders charge borrowers with poor credit a higher interest rate than those with outstanding credit. If you try to refinance while your credit score is less-than-stellar, it’s likely that you won’t be able to get a better interest rate than what you currently have. (And in some situations, it might be even higher than what you’re currently paying.) In this case, for the sake of your bank account, you’ll need to be patient and focus on improving your credit score first. Consider signing up for a free service like Credit Sesame, where you can get access to your free credit score as well as free monthly updates to help you monitor and track your progress. Once your credit score rebounds, then it may make sense to look into refinancing.

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Published March 5, 2014 Updated: November 3, 2016
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