Interest rates are still extremely low, but they aren't expected to stay there for long. Should you refinance before it's too late? Not necessarily. Here are four reasons why refinancing might be a bad idea.
1. The break-even period is too long.
The break-even period is the number of months it will take you to recoup the costs of closing a new loan. To calculate your breakeven period, you'll need to know how much the closing costs will be on your new loan and what your new interest rate will be. You should be able to get an estimate of these figures from a lender.
There is no magic number that represents an acceptable break-even period - it depends on how long you plan to stay in the house and how certain you are about that prediction.
2. The long-term costs are too high.
Refinancing to lower your monthly payment is great - unless it hurts you significantly in the long run. If you're several years into a 30-year mortgage, you've paid a lot of interest but not much principal. Refinancing into a 15-year mortgage will probably increase your monthly payment, possibly to a level that you can't afford. If you start over again with a new 30-year mortgage, you're starting with almost as much principal as you had at the beginning of your current mortgage. While your new interest rate will be lower, you'll be paying it for 30 years. So your long-term savings might be insignificant or the loan might even cost you more in the long run.
If lowering your monthly payment means the difference between staying current on a new, lower payment and defaulting on a current, higher payment, you might find this long-term reality acceptable. But if you can afford your current mortgage payment, you might now.
3. You'd have to move into an ARM to meaningfully lower your rate.
Let's say you already have a low interest rate: 5% on a 30-year fixed-rate mortgage. If you refinanced into another 30-year fixed at 4.5%, the monthly savings would not be substantial unless you have a mortgage several times larger than the national average.
Getting an adjustable-rate mortgage (ARM) might look like a great idea. ARMs have the lowest interest rates available: Quicken Loans advertises rates as low as 2.75%, for example. Advertised rates are so low that it might seem crazy not to take advantage of them, especially if you're planning to move by the time the ARM resets. Surely the housing market will have recovered in five or seven years and you'll be able to sell, right?
The thing is, rates are so low right now (around 4.5% for a 30-year, fixed-rate mortgage) by both historical and absolute standards that they aren't likely to be significantly lower in the future. So you'll probably either face significantly higher interest payments when the ARM resets, if you are able to refinance your way out of an ARM, or if interest payments if you manage to sell and buy a different home.
If you already have a low fixed interest rate and you're managing your payments, you might want to stick with the sure thing. An adjustable-rate mortgage is usually much riskier than a fixed-rate mortgage. It might pay off and save you thousands of dollars - or it might end up costing you thousands of dollars or even force you out of your home.
4. You can't afford the closing costs.
There isn't really any such thing as a no-cost refinance. You either pay the closing costs out of pocket or you pay a higher interest rate. In some cases, you're allowed to roll the closing costs into your loan, but then you're paying interest on them for as long as you have that loan.
Can you afford to spend several thousand dollars right now on closing costs, or do you need that money for something else? If you're looking at a no-cost refinance, is the refinance still worthwhile at the higher interest rate? If you're looking at rolling the closing costs into your loan, consider that $6,000 at 4.5% interest for 30 years will cost you approximately $5,000 extra in the long run compared to just paying the money out-of-pocket now.
The Bottom Line
The only person who can decide whether it's a good time to refinance is you - and if you want a professional opinion, you'll be more likely to get an unbiased answer from a fee-based financial advisor than from someone who wants to sell you a mortgage. The details of your individual situation, not the market, should be the biggest determining factor in whether you choose to refinance.
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