When Not to Refinance a Mortgage
by Brandon Cornett
The rest of this website offers tips on refinancing your home mortgage. But in order to see the full picture, we need to discuss when NOT to refinance a mortgage.
One of the most important things to understand about mortgage refinancing is that it's not always a good idea. Some homeowners mistakenly assume that any refinance is a good refinance, because it almost always leads to lower interest rates and mortgage payments.
In truth, refinancing your mortgage at the wrong time can be a financial disaster that eliminates the equity you have in your home, leaving you with nothing gained. How long you've held your current mortgage is the key to all of this.
When you refinance a home, you need a certain period of time to recoup the cost of refinancing. This is often called the "break-even" point -- the point at which the money you've saved each month (with your lower interest rate) surpasses the cost of refinancing.
If you've been in the home for many years, there's a good chance you won't have enough monthly payments left to recoup your refinancing costs. This is especially true when there's not a huge difference between your previous interest rate and the (lower) refinanced interest rate. If the difference is small, you'll have to make the new payments for a longer period of time to reach the break-even point, at which you recoup your expenses.
How can you determine this break-even point? By using a mortgage refinance calculator like the ones listed in the resources section of this website.
More advice on when NOT to refinance a mortgage:
"Refinancing might be a bad deal for a homeowner who has been paying the same mortgage for many years. If you have been paying for 20 years on a 30-year mortgage, refinancing for another 30 years might result in a lower monthly payment. But you would be making those payments for 30 more years instead of 10." -BankRate.com
"To save money, you must stay in your house longer than the "break-even period" -- the period over which the interest savings just cover the refinance costs. The larger the spread between the new interest rate and the rate on your existing loan, the shorter the break-even period. The more it costs to obtain the new loan, the longer the break-even period." -Mortgage Professor
"The most obvious case of when refinancing doesn't make sense is when the homeowner won't live in the house long enough for the savings from a refinancing to outweigh the costs of getting a loan." -MSN Money
Conclusion
Always do the math before trying to refinance your mortgage. Find out if your monthly savings by having a lower rate will accumulate long enough to surpass the cost of refinancing. Otherwise, it's not a good idea to refinance.
* Copyright 2007, Brandon Cornett. Brandon is the publisher of Mortgage Refinance Advice.
Related article: Should I refinance my mortgage?