3 signs now is not a good time to refinance
Should you refinance your house? Not before reading this.
Refinancing a home is a major financial decision. You will need to apply for a brand new mortgage, either from your current lender or from another. And if you’re approved, you’ll have to pay closing costs during the transaction process, which can be as much as 2% to 5% of your loan value.
That said, while the process can be complicated and cost you several thousand dollars up front, it can be the right decision in many circumstances if it saves you money on your mortgage repayment. . Since your mortgage is probably your biggest debt, lowering the cost could free up money in your monthly budget if you lower your payments, and it could also save you money over time.
However, sometimes refinancing is probably not the right choice. Here are three red flags that suggest now is not the right time to get a new home loan.
1. You will be moving soon
If you are moving soon, refinancing usually won’t pay off. This is because the savings you can make by lowering your interest rate only really materialize over time.
Even if you lower your rate significantly, you can only reduce your monthly payment by a small amount each month. It can take years for the small reduction in your monthly payment to total enough money to cover closing costs you had to pay up front.
You can determine how long you will need to stay in your home by calculating the monthly refinancing savings as well as closing costs and dividing the closing costs by the amount saved.
For example, if your closing costs are $ 5,000 and you save $ 40 per month with your new loan, it would take you 125 months – 10.4 years – to break even on the initial costs. If you were planning a move in the next few years, you wouldn’t get back the money you spent up front, and refinancing wouldn’t be advisable.
2. You have just changed jobs
Mortgage lenders generally want to see consistent proof of income to confirm that you are likely to pay off your loan. A recent job change is a red flag that your future income may not be as stable, making lenders nervous about your prospects for paying off the loan in full.
If you’ve recently changed jobs, you may want to wait until you’ve been in your current position for at least a year or two before applying for a loan refinance to maximize your chances of getting the best rate.
3. Your credit score is not good
Your credit score is also important when you apply for a refinance loan. Lenders use your credit score as a measure of how reliably you have paid your bills in the past and how likely you are to pay off the refinanced mortgage in the future.
A low credit score could make it difficult to obtain the most competitive interest rate on a refinance loan. And if you can’t lower your rate by about a percentage point, it often doesn’t make sense to bother or pay the fees for getting a refinance loan.
In the end, if any of these three red flags apply to you, refinancing probably won’t make sense. While you can always review your loan options, you’ll likely find that waiting to refinance is a better financial choice.