Things to Consider Before Refinancing a Mortgage

Many people are thinking about refinancing their mortgage because they know that they may get low interest rates. However, refinancing a mortgage is not always the best decision to take. The following are conditions in which mortgage refinancing may not be a good idea:


1. Long Break-even Period

Before people decide to refinance their mortgage, they have to calculate the break even period. To calculate the break even period, people need to know how much money they will have to spend on the new loan‘s closing costs. People can ask their lender to get the estimation, and use the number to do the break even period calculation. There is no standard of acceptable break even period. Everything depends on how long people plan to stay in the house, and how sure they are with their prediction.

2. Expensive Long-term Costs

Refinancing a mortgage can be a great way to lower the monthly payment. However, it may actually be more expensive in the long run. People who have been in a 30-year mortgage for a few years have paid a considerable amount of money for the interest, but they have not paid much of the principal. If they refinance with another 30-year mortgage, they can get lower interest, but they have to be paying it for another 30 years. In this case, the amount of money that people save from refinancing is actually insignificant compared to the amount of money that they will spend in the long run.

3. Having to Change to an ARM to Get Lower Rate

People who already have a low interest rate on their mortgage will need to refinance with an adjustable-rate mortgage if they want to benefit from substantial savings. The interest rates of adjustable-rate mortgages are the lowest in the industry. Because the interest rates are so low, many people decided to take an adjustable-rate mortgage to refinance their previous mortgage without even thinking. The problem with adjustable-rate mortgages is that the interest rates are currently low, but they may not be as low in the future. People who take an adjustable-rate mortgage may face higher monthly payments when the mortgage resets.

4. Expensive Closing Costs

When people refinance their mortgage, they have to pay some costs. The problem is that mortgage closing costs are not cheap. Usually, people have to pay thousands of dollars on closing costs. Some lenders provide the option to roll the closing costs into the loan, but of course, people will need to pay interest on it.

Most people find it difficult to decide whether to refinance their mortgage or not. Rather than doing something that they may regret for many years, people should get a professional opinion from a financial advisor, not from people who want to sell a mortgage to them.