7 Times When Refinancing Your Mortgage Isn’t Worth It

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Refinancing your mortgage can save you a lot of money in interest and lower your monthly payment — when the numbers makes sense, that is. But there are times when a seemingly money-saving move like a refinance can backfire. In short, there are times when it doesn’t pay to refinance.

So if you’re a homeowner asking yourself, “Should I refinance my mortgage?” make sure you read up on these seven common times when refinancing could be a costly move.

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1. You Can’t Lower Your Interest Rate Enough To Offset Refinancing Costs

Lowering your interest rate is likely the reason you’re thinking of refinancing. But refinancing costs money, whether out-of-pocket or financed into the new loan. You’ll want to make sure you can recoup those costs, which are usually 2% to 5% of the borrowed amount, with average closing costs totaling about $5,000, according to Freddie Mac.

Some lenders offer refinance loans with no closing costs, but Freddie Mac warns that there’s no such thing as a free loan. The lender is likely charging higher interest to recoup the closing costs over the life of the loan.

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“You also have to consider that you might be adding more years to your loan,” said Mark Ferguson, a real estate agent and investor who runs InvestFourMore. “It’s smart to look at the interest you are paying every month versus the principal with the new loan and old loan as well. You might get a much lower monthly mortgage payment with a new loan, but more of that payment might be going to interest than your current loan. That’s a big consideration.”

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2. You’re Trying To Pay Off Your Loan Sooner

If you’re making more money since you bought your home, you might be considering refinancing to a shorter-term mortgage, like a 15-year loan, which typically comes with a higher monthly payment but lower lifetime interest costs than a 30-year loan. And that could be a great idea. However, you might want to consider merely making extra payments on your current loan to pay it off sooner, thus avoiding refinance costs but still saving in interest, said Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”

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How you structure those payments is up to you — you can pay more each month, designating the overpayment as a principal payment; make occasional lump-sum principal payments; or make an extra mortgage payment each year. An online mortgage calculator can help you compare how extra payments and refinancing affect the time it takes to repay the loan and how much you’ll pay in interest.

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Important To Note

Your lender might allow you to switch from a monthly payment schedule to a biweekly one. This can help you pay off your mortgage faster but probably not for the reason you think. Unless your lender applies the principal portions to your balance right away instead of just once per month[as with Rocket Mortgage loan], as is often the case, the only benefit to paying every two weeks is that it results in 13 payments per year instead of 12.

3. You Have to Move to an ARM to Lower Your Rate

With an adjustable-rate mortgage, you’ll get a very attractive, low interest rate for a set period of time — typically, anywhere from one to seven years — but, unlike a fixed-rate mortgage, your ARM rate will adjust to the going market rate after that. The problem is that interest rates are bound to go up, said Fleming.

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“I would only recommend this for folks who could absorb the higher payment if rates did go up,” he said.

He did add that one selling point of an ARM is that with the lower interest rate, you will pay down the principal faster, and that means the higher interest rate in the future affects you less.

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4. You’re Going to Sell Your Home Within a Few Years

Again, refinancing costs money. You’ll want to know that you are staying in your home for a long enough time after the refinance to recoup those costs, said Ferguson. Ideally, you’ll want to keep your refinanced loan past the break-even point — the point at which you actually start saving money.

“The time you live in your home should be a major consideration. If you plan to move in a year or two, refinancing might not make sense, unless you are using the cash from the refinance for something that cannot wait,” Ferguson said.

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One final note: This might be a time to check out an ARM, which can dramatically lower your interest rate for a few years and save you money until you sell, said Ferguson. Just make sure you will be selling before it adjusts.

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5. The Long-Term Costs Outweigh the Savings

Many times, said Fleming, refinancing looks good initially, but after a little math, you discover it’s not such a great deal in the long run. “First, you’re adding years to the end of your loan. If you keep the loan for its full term, in most cases you would actually pay more for having refinanced,” Fleming said. This is because of the extra years of interest, even at a lower rate.

He suggested having your mortgage advisor calculate how much interest you’re going to pay on your existing loan over however long you believe you will keep the loan, and compare it to the sum of the closing costs of the proposed loan and the interest cost of the proposed loan over the same period. “Make sure they look only at the interest cost, and not at principal plus interest,” he said. That’s because the interest, plus the refinancing cost, is the true cost of your loan.

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6. You’re Doing It to Tap Into Your Home’s Equity

Whether this is a no-no or not depends on what you need the cash for, said Ferguson. “I use cash refinances to buy rental properties and make more money,” he said. “If you are using the money to buy a car, maybe [that’s] not too smart. If you are using the money to pay off higher-interest debt, it might make sense.”

Fleming agreed, citing two key principles at work here. “You should never finance anything longer than you will use it, and you should only tap your home’s equity to reinvest the money into your home or another property,” Fleming advised.

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7. You Can’t Afford the Closing Costs

Refinancing could cost you a minimum of 2% of the loan amount. On a $300,000 loan, that’s $6,000. You have three options to pay it, said Fleming. One is to come up with the cash out-of-pocket. The second is to accept a higher interest rate for a “no-fees, no-costs” loan. The third is to finance the costs by having that amount added to the amount you are borrowing. Obviously, all of these cost you — the lenders will always get their money. The question is, how much will they get? And is it still worth refinancing?

And financing the closing costs effectively makes them much more expensive: $6,000 at 3% over 30 years costs you an extra $3,107 in interest. So your closing costs are effectively $9,107. Ask your mortgage advisor or use a mortgage refinance calculator to run your own numbers. Then it’s up to you to decide if it’s still worth it.

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