Refinancing your home loan can be a very smart financial decision under the right circumstances. But there are times when getting a new home loan is definitely not the best choice. In particular, here are three situations where you might end up regretting your decision to refinance.
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1. When you cannot benefit from a lower interest rate
The goal of refinancing is usually to reduce the interest rate you are paying on your current mortgage. If you can’t get a lower rate than what you’re paying now, refinancing would be a mistake. If you ended up taking out a new mortgage at a upper rate, you would increase your total borrowing costs.
2. When you will move soon
If you can refinance and lower your interest rate, you should be able to save on your mortgage. However, you should take into account that there are upfront fees to pay when you refinance. These costs are called closing costs, and they can add up to several thousand dollars.
For refinancing to make sense, the money you save by reducing your interest rate should cover the upfront fees you pay. Otherwise, you won’t break even after paying these fees. And if you’re moving soon, the savings from refinancing may just not be enough to cover those costs before you move.
Ideally, you’ll want to stay in your home long enough after refinancing to not only cover costs, but actually find yourself better off after refinancing.
Let’s say you spend $ 5,000 on closing costs and save $ 70 per month on your mortgage payment. By dividing $ 5,000 (your closing costs) by $ 70 (your monthly savings), you can see that it would take you almost six years (71 months) for the $ 70 saved to make up for the initial expense of $ 5,000. .
3. When You Extend Your Repayment Schedule Too Much
In some cases, when you refinance, you will be extending your loan repayment period. For example, if you have 10 years left on your mortgage and you refinance a new 30-year loan, you would add 20 years to your repayment term.
Extending your repayment schedule will reduce the amount you pay each month, possibly by a lot. However, even if you lower your interest rate, you will end up paying a lot more interest since you will be making payments for a longer period of time.
To avoid ending up with a loan that costs you much more over time, aim to meet a repayment schedule that is close to the remaining term of your current loan. If you only had 10 years to pay off your current mortgage, for example, refinancing a loan over 10 or 15 years would be a better option if a refinancing lender makes it possible.
You need to make sure you look at the total refinancing costs, including repayment costs over time and closing costs, so you can make the right choice about whether getting a new home loan is a good idea. sound financial decision or one that you might regret.