Refinancing: When Isn't It Worth It?

People use refinancing as a financial strategy in many situations. Homeowners refinance their mortgages to secure lower interest rates, lengthen or shorten the terms of their mortgages, convert to or from an adjustable-rate mortgage, tap into their equity to finance a large purchase or consolidate debt.

In any of these situations, refinancing may be key to improving your financial situation or helping you to reach other financial goals. For example, if you have a goal to retire in 15 years but you still have 25 years on your mortgage, it might make sense to refinance to a 15-year mortgage with a lower interest rate in order to help you reach your goal.

Whatever your goal, it’s wise to look at the costs of refinancing before moving forward. In this post, we’ll look at some considerations to keep in mind when making your decision. When is the right time to consider refinancing? Are there times when refinancing is not the best strategy?

 

When You Won’t Own the Property Much Longer

It’s important to remember that refinancing may cost anywhere between 3 to 6 percent of the loan’s principal (depending on the loan size). Therefore, it can take years to recuperate your refinancing costs with the savings you acquire through your new lower interest rate or your new shorter term.

If you don’t think you’ll be living in your home for more than a few years, it probably doesn’t make sense to refinance. You won’t be there long enough to recoup the costs incurred by the refinance.

For many people, it’s impossible to say whether or not you’ll own the property much longer. If you’re unsure about the stability of your employment, consider what you would do if you had to move to a new location because of a job. Some people keep their home and turn it into a rental property in order to preserve their new, advantageous mortgage. This is an option for people who want to refinance but aren’t sure if they’ll continue to live in the same location.

 

When You Won’t Save Much by Refinancing

If you already have a relatively low interest rate on your mortgage, a small decrease probably won’t be worth the refinancing fees. With a 3 to 6 percent refinancing fee, it will take many years to recuperate your costs.

If paying your mortgage off early and avoiding interest is your goal, you might want to consider just adding an extra principal payment to your mortgage payment each month. By paying just an extra $100 each month, you will significantly reduce the amount of interest you pay over the life of your loan.

 

When Refinancing Puts You Further from Your Long-Term Goals

Ultimately, savvy homeowners want to reduce their debt, save money on interest, build their equity and eliminate their mortgage altogether. If refinancing doesn’t get you closer to achieving these goals, it’s probably not a good idea.

When homeowners use refinancing simply to access their equity for a large purchase, the refinance can actually be harmful to their overall financial well-being. Although it can be tempting to use home equity for the purchase of a something you’ve always wanted, resist this impulse and remind yourself of your long-term financial goals.

 

Does Refinancing Ever Make Sense?

We’ve talked about times when it doesn’t make sense to refinance, but are there times when refinancing does make good financial sense? Absolutely.

Some people are able to significantly reduce their monthly payments by refinancing, either because they secure a much lower interest rate or because their equity has grown over the years. Having a much smaller monthly payment gives you all kinds of fresh options. With the money you save on your mortgage, maybe you can start a business, invest for the future or pay off debts.

Another smart approach may be to use the equity in your existing home to finance the purchase of another property. By leveraging your equity in this way, you can potentially enhance the returns from property investment.

In the end, it’s wise to discuss refinancing with your wealth adviser. With your long-term financial goals in mind and a solid understanding of your current financial situation, you’ll be in a good position to make a well-informed and strategic decision.

For more information about refinancing, or to get in touch with one of our wealth advisers, reach out to us at Altus Financial.