Seven times when you should not refinance

Interest rates are at an all-time low, which can influence homeowners to refinance their mortgages. In some instances, this makes a lot of sense. However, there are some times when refinancing your mortgage may not be your best option.

Paying off credit card debt

Resist the urge to pay off high-interest debt, such as credit card debt, by rolling it into a new mortgage. On the surface it seems like a smart move, but by moving unsecured debt into a loan backed by your home, you put yourself in danger of losing your home if you can’t make the payment. Many consumers are tempted to run up credit card debt when they have a zero balance.

Moving to a longer term

If you have been paying on your loan for more than ten years it may not be worth it to you to refinance. Check the long-term cost of the loan. If you’ve been paying on a 30-year mortgage for 18 years and refinance to get a lower payment, the extra mortgage payments and interest you pay could negate any savings you would realize over the long term.

If you’re not saving at least one percent

This is a good rule of thumb and should be considered the jumping off point. If the monthly savings you’ll see can’t cover the cost of the new loan, it’s simply not worth it. There will be loan fees and other costs.

Taking advantage of a no-cost refinance

There’s no such thing as a "no-cost" mortgage loan. There are several ways to pay for closing costs and fees when refinancing. In every case, the homeowner pays the fees one way or another; either with cash or by including it in the principal. Another option is that the lender would pay the costs by charging a slightly higher interest rate, which means you pay it.

If your credit rating has gone down

Life happens. If your credit rating has gone down, it’s not the end of the world, but it might spell the end of considering a refi. You still may be able to qualify, but at a higher rate. If that’s the case, refinancing could cost you more in the long run.

If you’re planning to move soon

Generally, if you plan to move in less than five years, refinancing may not make sense. It takes time to build up equity; the cost savings over a couple of years may not pay for the expenses associated with refinancing. Consider how long you plan to stay in your home before you refinance.

If you don’t have enough equity

You may be approved by some lenders even if you have little equity in your home. You’ll end up paying the price if you don’t have at least 20% equity because you may have to pay for Private Mortgage Insurance (PMI), which can be expensive and adds to your mortgage payments each month.

A final word about refinancing

There are a lot of options to consider. Do the math. If it will cost you more in the long term, don’t do it. Talk to your lender and REALTOR® before making any decisions.