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When Refi Isn’t Right

Living Insights

Are you considering refinancing your home? Refinancing while rates are low can be quite tempting, but it’s not always the smartest choice. Before calling up your mortgage lender,  consider these reasons why putting your refinance plans on hold may be a better move.

Staying Put?

Pay attention to the break-even point. This is the amount of time it will take for you to recover the closing costs on the new loan. It’s calculated based on how much you pay in closing costs and what your new interest rate will be.

Closing costs generally average between 2 and 5 percent. It could take years to break even. If the plan is to move before the break-even period ends, refinancing probably isn’t the best course of action because you won’t be reaping any significant long-term financial benefits.

Poor Credit

Credit score plays a major part in determining qualification for refinance rate. The higher your score, the better the deal will be. If your credit isn’t great, finding a lender who’ll be willing to work with you on a refinance can be difficult. Even if you qualify for a loan, the rate most likely won’t be that great.

Waiting until your credit score improves even just a few points could make a significant difference to the type of rate you can get.

Affording Closing Costs

Refinancing doesn’t do any good without enough money to cover the closing costs. If you can’t pony up the cash up front, you may be able to roll the closing costs over into your loan but there are some drawbacks.

Even with low closing costs, adding them into the loan can tack on several thousand dollars to your mortgage. Not only are you taking a bite out of your equity, you’re potentially making your monthly payments higher. Over the long term, adding the closing costs to your mortgage can be detrimental to your savings you’d get from refinancing.

Long-Term Costs

Refinancing doesn’t guarantee saving money and in some cases, it could actually work against you. If you’ve been paying your existing loan for a while, you’ve probably paid more on the interest than the principal. Refinancing into a 30-year loan for a lower payment will result in paying the interest twice even if it’s at a much lower rate the second time around.

Refinancing into a 15- or 20-year loan shortens the repayment period but you’ll end up paying more every month towards your mortgage. While a higher payment may be affordable now, consider if it will still be reasonable in the future. Even though you’ll be paying your loan off faster, you must sustain the pace if your financial situation changes.

Pulling Equity

At times it may seem like tapping into your home equity is a smart move. For example, you could use the cash to consolidate your debts at a lower rate, finance some major home improvement projects, start a business or cover the cost of your children’s college education. However, unless you know you can cover your mortgage payments in the long term,it’s probably smarter to not touch your equity. Cashing out your equity can put money in your pocket but you run the risk of losing your home if you can’t keep up with your loan payments.

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