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Top Reasons Not To Refinance Your Home: When And Why Refinancing Might Be A Bad Idea

May 21, 2024 8-minute read

Author: Molly Grace

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Interest in refinancing experienced a huge surge among homeowners in the past few years thanks to record low interest rates. In the summer of 2020, the average 30-year fixed rate dipped to about 3%.

This drop in interest rates led to an increase in curiosity about the idea of refinancing. Refinancing your mortgage can come with a lot of benefits, including lowering your monthly payment and saving you a lot of money in the long run.

But it’s important to understand that it isn’t always a smart financial move. Whether or not refinancing makes sense for you depends on your individual situation.

Here are some reasons why you might not want to refinance your home.

What To Consider Before Refinancing Your Mortgage: 5 Factors

When you refinance your mortgage, you’re taking out a new loan to replace your current one. Homeowners typically decide to do this because there’s a benefit to getting a new loan, such as snagging lower refinance rates or shortening their term length.

The process is pretty similar to what you’ll go through when you get a mortgage to purchase a home. With a refinance, however, instead of using the new mortgage to purchase a home, you’ll use it to pay off your current mortgage. You’ll then make monthly payments on the new mortgage.

Anytime you’re taking out a large loan like a mortgage, it’s a big deal. Here are some things homeowners should think about if they’re considering refinancing.

1. The Expense

Getting a loan isn’t free. With any mortgage, including a mortgage refinance, you’ll have to pay closing costs. In general, mortgage refinance closing costs are between 2% – 6% of the loan amount.

Closing costs are usually paid in cash at closing. If you want to keep your upfront costs low, it’s also possible to roll your closing costs into the cost of the loan, or to have the lender cover your closing costs in exchange for you taking on a higher interest rate. This is known as a no-closing-cost refinance.

2. Your Credit Situation

Just like when you apply for a mortgage to purchase a home, you’ll need to meet a lender’s credit requirements to be approved for a mortgage refinance.

If your credit score has changed since you first got your mortgage, you’ll want to make sure it still meets typical lender requirements for mortgage approval (usually 620 for a conventional loan, 580 for an FHA loan or VA loan). If your credit is too low to refinance, you might need to spend some time repairing your score before applying.

Lenders will look at other aspects of your financial situation as well, such as your debt-to-income (DTI) ratio, your work history and the amount of equity you have in your home.

3. Your Loan Term

When you refinance, you’re taking on a new loan, which might mean either extending or shortening the length of time you’ll spend paying off that loan.

Let’s say you bought your house using a 30-year mortgage. You spend a few years paying your mortgage, then decide you’d like to refinance. You might choose to refinance into another 30-year mortgage, meaning you’re essentially resetting the clock on your term, or you might prefer a shorter term than what you originally got, like a 15-year mortgage or a 20-year mortgage, which can raise your monthly payment but save you more money in the long term. You may even be able to refinance into a term that matches the amount of time you had left on your original loan.

The loan term that’s best for you depends on your goals.

4. Your Equity

Equity is your ownership interest in your home. It’s the amount of money you have in your home that isn’t tied up in your mortgage.

For example, let’s say you buy a house for $200,000. You make a down payment of 20%, or $40,000. The mortgage will then cover the remaining $160,000. This means that you’ll immediately start with 20% equity in your home. As you pay your monthly mortgage payment, or if your home’s value goes up, that percentage will continue to increase.

You may need to have a certain amount of equity in your home before you’ll be able to refinance.

5. Your Eligibility

Depending on the type of loan you have and the type of refinance you’re getting, you may be required to wait a certain amount of time after the closing of your original loan before you can refinance.

Additionally, if your loan has a prepayment penalty, you may want to wait a few years until the penalty no longer applies before refinancing. There are no prepayment penalties with Rocket Mortgage®.

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9 Situations Where You Shouldn’t Refinance Your Mortgage

Here are some times when refinancing might not make sense.

1. It Will Take You Too Long To Break Even

If you plan to refinance to a lower monthly payment, you might assume that you’ll immediately start saving money. But that isn’t necessarily the case, it can take a while to reach this point.

To calculate your savings, you have to factor in how much you spend on closing costs to secure the loan and consider how long you plan to stay in the home. For example, let’s say you spend $8,000 to refinance into a loan that saves you $100 each month. To figure out your break-even point, you’ll divide the total cost of the loan by your monthly savings.

8,000 ÷ 100 = 80

In this example, it will take 80 months, or 6 years and 8 months, to break even.

Once you break even on that amount, you’ll have fully recouped the costs associated with getting the loan. After that, you’ll begin actually saving money.

2. It Will Cost You More In The Long Run

Depending on the type of refinance you get, it’s possible for your new loan to end up costing you more money in the long run than if you’d just stuck with your original loan.

This can happen when you extend your loan term because you’re lengthening the time you’ll spend paying interest.

However, a lot of benefits can come with extending your loan term, especially if you’re having trouble keeping up with your current mortgage payment. Having a more manageable monthly payment may be worth the trade-off for some homeowners.

3. You Already Have A Low Fixed-Term Mortgage Rate

If rates are lower than your current mortgage rate, it might seem like a no-brainer to refinance.

But if your rate is already relatively low and current rates aren’t significantly lower than yours, you might not end up saving as much money as you thought you would.

4. You Can’t Afford Your Closing Costs

Closing costs include things like appraisals, origination fees and other costs associated with preparing and closing on your loan.

If you don’t have enough cash, you might be tempted to roll your closing costs into your loan amount or take on a higher rate to avoid paying these costs upfront.

However, when you do this, you’re potentially cutting into the savings from your refinance because you’re now also paying interest on those closing costs.

5. You Plan To Move In A Few Years

There’s typically not much of a benefit to refinancing if you’re planning to sell soon.

Remember your break-even point? If you sell your home before you reach that point, you won’t fully recoup the money you spent getting your loan – not to mention the savings you could be missing out on.

If you don’t expect to live in your home beyond your break-even point, the costs you take on upfront have a high chance of outweighing any potential savings in interest.

6. Your Credit Score Is Low

If you have a lower score than you did when you were approved for your original mortgage, you could end up being offered less attractive terms on your refinance. This is also true for other aspects of your financial situation, such as if your debt-to-income ratio has increased.

7. A Higher Monthly Payment Will Stretch Your Budget

Sometimes, homeowners will refinance into a shorter-term loan to pay off their mortgage faster and reduce the amount they’ll pay in interest over the life of the loan. However, this can be risky since it typically locks you into a higher monthly payment.

The benefit of having a lower monthly payment is that it gives you more wiggle room if you encounter a period of financial difficulty or have a month where your budget is tighter than usual.

If you want to pay off your current loan faster but aren’t sure if the cost of refinancing into a shorter term would be a good move, it might make more sense to just make additional payments each month. That way, you have the flexibility to make larger payments when your budget allows for it and only pay your normal amount when you don’t have the extra cash.

Plus, even if you have the extra money in your budget to take on a higher monthly payment, you might decide that money could be better used for other financial goals, such as saving for retirement or investing.

8. You’re Unnecessarily Risking Your Equity

A cash-out refinance allows you to tap into the equity you have in your home and convert it into cash. This can be especially useful for things like paying for a renovation project that boosts the value of your home or paying down a large amount of high-interest debt.

However, cash-out refinances aren’t always the best financing option, since you’re taking equity out of your home and creating extra debt that’s secured by your home.

If you’re considering a cash-out refinance, think about how you plan to use that money and whether it will help or hinder you financially.

9. You Haven’t Done The Math

Ultimately, whether or not a refinance makes sense for you comes down to math. Everyone’s situation is different, and the only way to know whether a refinance will help you meet your financial goals – whether that’s lowering your monthly payment, paying off your loan faster or saving money on interest is by doing the math based on your individual numbers.

You can get started by plugging your numbers into our refinance calculator to see how much you could potentially save.

The Most Asked Questions About Mortgage Refinancing

If you’re still considering refinancing your home after learning about situations where you shouldn’t, it’s worth understanding a few other facets of refinancing.

How Often Can You Refinance Your Home?

Legally, you can refinance your mortgage as often as you’d like, but most lenders acknowledge a ‘seasoning’ period between refinances. For cash-out refinances, this is typically a 6 – 12-month gap to demonstrate to lenders that your home’s value is stable and that you can reliably make payments.

When’s The Best Time To Refinance A Mortgage?

The best time to refinance your mortgage is often when interest rates are lower than your current rate. While this can allow you to save money on interest or lower your monthly payments, keep in mind that slightly slower rates may not actually save you all that much money in the long run. Factoring in closing costs and any other complications, a refinance to a slightly lower rate may be more trouble than it’s worth.

The Bottom Line

When trying to decide if you should refinance, it’s important to have an understanding of the current market, your home’s financial state and your long-term plans as a homeowner.

The potential to lower your monthly payments, reduce your loan’s overall interest and tap into your home’s equity may be tempting. However, it’s essential to factor in closing costs, the impact to your home’s equity, and the possibility of extending your loan term. All are valid reasons to not refinance your home.

At the end of the day, whether refinancing is a good idea or a bad idea just depends on what’s right for you. If it makes sense for your financial goals, start the approval process to refinance your home with Rocket Mortgage. 

Get approved to refinance.

See expert-recommended refinance options and customize them to fit your budget.

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Molly Grace

Molly Grace is a staff writer focusing on mortgages, personal finance and homeownership. She has a B.A. in journalism from Indiana University. You can follow her on Twitter @themollygrace.