Don’t rush to refinance mindlessly.
There’s a reason so many homeowners have refinanced their mortgages this year. Refinancing rates have been at attractive levels since mid-2020, and if you swap your existing home loan for a new one at a lower interest rate, you could significantly reduce your monthly housing payments.
In addition, this year, homes have gained a lot of value across the board. This means that borrowers have more equity in their home that can be used to refinance with cash.
With withdrawal refinancing, you borrow more than your remaining mortgage balance and use the extra money you get for all intents and purposes. Since 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 could help you. But if these things apply to you, it’s a gesture you might regret, too.
1. You apply after a drop in your credit rating
The purpose of refinancing is to secure a mortgage loan on more favorable terms. Often times, this means lowering the interest rate on your loan.
But to get a low interest rate, you will need a strong credit rating. And if your credit has recently taken a hit, it’s best to wait for the refinance until you are able to increase it.
You might have recently missed a loan repayment or been several months late in paying a minimum credit card payment. Unfortunately, even a single late payment can result in a significant drop in your credit score. If this is the situation you find yourself in, it’s probably a bad time to refinance.
2. Your plans for staying in your home are uncertain.
When you refinance a mortgage, you are charged closing costs to finalize that loan. These costs vary depending on the lender and can be as high as 5% of your loan amount. You will need to make sure that you intend to stay in your house long enough to collect them and come out on top. If you refinance when you are unsure of your long-term plans, you could lose money.
Suppose you are charged $ 6,000 in closing costs to refinance. This could result in mortgage payments that would cost you $ 200 less per month. However, it will take 30 months for you to break even after paying these fees. And if you’re not sure you want to stay in your neighborhood, or if you think you might move out for a job within the next couple of years, then refinancing is a move you might lament after the fact.
3. You have not yet made your decision on the renovations
If you are doing renovations, cash refinancing could be a great way to pay them off. But if you haven’t yet priced these renovations or defined a specific plan, you might 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, a month later, you decide to redo your master bathroom as well, you may not have enough money from that withdrawal to cover your costs. A better bet is to settle your home improvement plans before applying for a new mortgage.
Refinancing can be beneficial to you in many ways. Just make sure that the timing is right before you apply, and that you’ve really thought about things if you are borrowing more in the process.