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When Not To Refinance Your Mortgage

Whether refinancing is the right option for you really comes down to whether it is going to save you or cost you money. For the most part, this is a matter of timing--short term, and long term.

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Closings Costs

Refinancing--and mortgages in general--always incur closing costs. This is one of the most important short term considerations, because it adds a significant upfront expense that you must be prepared to cover. (The exception, known as No Cost Refinancing, simply adds your closing costs into the new loan, subject to interest and changing the long term cost of refinancing).

Even before you get to closing, there will very likely be additional fees for things like locking in your new rate with a lender, paying for an appraisal of your home, and having your credit checked. You will be on the hook for these regardless of whether you complete the entire process, so they should figure into your calculations of your break-even point.

Adjustable Rates Offer Better Savings

Of course, there is more to short-term savings than just closing costs and affordability. Jumping from an Adjustable-Rate Mortgage (ARM) to a fixed rate is often practical--but maximizing your savings might mean postponing refinancing longer than you think. You don’t want to give up savings just to gain predictability in your monthly bills.

ARMs are not inherently bad; rates can go up just as easily as they can go down, and that could mean better interest for you without the expense of refinancing. Just because you can afford to swap your ARM for a fixed-rate doesn’t necessarily mean you need to--yet. A fixed-rate almost always means a higher--but stable--interest rate. As long as the ARM is on the low end, you might as well take advantage, and wait until it is going to tick up above a certain threshold before you commit to the fixed-rate.

You Won’t Pass Your Break-Even Point

This is where the refinance calculator tool is invaluable. Getting preoccupied with a low rate or a shorter repayment period can distract you from the overall effects of interest. When you refinance, you are hitting the “reset” button on your mortgage. All mortgages front-load interest, so when you start making payments at the new rate, you are once again chipping away at the interest before the principal. It may feel great to make a lower monthly payment, but by doing so you are also giving the interest more time to grow.

If the timing is right, you can still manage to save money with reduced interest. You could pay more than the minimum, sacrificing short-term savings for a lower long-term interest obligation. If you won’t be staying in the home long enough to pass your break-even point, though, even the best interest rate can’t justify going ahead with your refinancing.

Your Home Lost Value

The fluctuations of the market may not be on your side--or on your schedule. Changes in the value of your home due to market pressures can change your equity stake. If your home’s value has dropped, you may very well owe more on the home than it is currently worth--also known as being “underwater.” In that case, refinancing isn’t even an option. You need to gain more equity (by paying your mortgage, or through another market cycle that sees home values go up) to get out from underwater on your home.

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