Do not rush to refinance without thinking things through.
There is a reason many homeowners are refinancing their mortgages this year. Refinancing rates have been at attractive levels since mid-2020, and if you replace your existing home loan with a new one at a lower interest rate, you can significantly reduce your monthly housing payments.
Also, this year, homes have gained a lot of value across the board. This means that borrowers are sitting on more real estate equity that can be used for cash refinancing.
With cash refinancing, you borrow more than your remaining mortgage balance and use the extra money you get for whatever purpose you want. Because the interest rates are so low, it’s an affordable way to borrow money, especially for things like home renovations.
Refinancing your mortgage is a decision that may serve you well. But if these things apply to you, this is also a move you might regret.
1. You progress after your credit score drops
The whole purpose of refinancing is to secure a mortgage on more favorable terms. This often means lowering the interest rate on your loan.
But to get a low interest rate, you’ll need a solid credit score. And if your credit has recently taken a hit, it’s a good idea to delay refinancing until you can increase it.
It could be that you recently defaulted on a loan or were several months late in paying the minimum credit card payment. Unfortunately, even one late payment can cause a significant drop in your credit score. If this is the situation you are in, this is probably a bad time to refinance.
2. Your plans to stay at home are uncertain
When you refinance a mortgage, you are billed for closing costs to complete that loan. These costs vary by lender and can be up to 5% of your loan amount. You will need to make sure that you intend to stay in your home long enough to retrieve them and move out forward. If you refinance at a time when you aren’t sure of your long-term plans, you may end up throwing money away.
Let’s say you paid $6000 in closing costs for refinancing. Doing so could result in mortgage payments that cost you $200 less per month. However, it will take 30 months for you to arrive even after you pay these fees. And if you’re not sure you want to stay in your area, or think you might move into a job in the next couple of years, refinancing is a step you might bemoan after the fact.
3. You haven’t made up your mind about renovations
If you are going to do renovations, cash refinancing could be a great way to pay for it. But if you haven’t priced those renewals yet or settled on a particular plan, you may regret refinancing your home loan.
Imagine you decide to do a cash refinance that puts $20,000 in your pocket to finish your basement. If, after a month, you decide that you also want to redo your master bathroom, you may not have enough money from that cash to cover your costs. Your best bet is to settle your home renovation plans before applying for a new mortgage.
Refinancing is a step that can benefit you in many ways. Just make sure the timing is right before applying, and that you’ve thought things through if you’re borrowing more in the process.