When NOT to Refinance Your Mortgage

Published on November 22, 2016

– 5 min read

Yes, it’s true. Mortgages rates are at near historic lows (even with recent upticks). You may be thinking you can’t lose by refinancing.

Well, just because interest rates are lower than what you have doesn’t mean refinancing is a no-brainer. Here are three good reasons refinancing may not be the right move:

#1 – You’ve had your existing loan for a while 

Every month, your mortgage payment is broken up into chunks. One part of the payment goes towards paying interest on your loan. Another part goes towards paying down the original loan amount – called the principal balance. In the beginning stages of a loan, a majority of the payment goes towards interest. That shifts over time, and towards the end of the loan, a majority of the payment goes towards the principal balance.

Because of this, if you’ve had a loan for a long time, a large part of your monthly payment might be going towards principal, which translates into equity. If you were to refinance a loan, this cycle would reset, and the bulk of your payment would go back towards paying interest on the loan.

Portion of Interest vs. Principal Over Time 

#2 You do not plan on being in the home much longer 

Refinancing a loan comes at a cost. Closing costs in a refi can be in the thousands of dollars, spanning lender fees, appraisal fees, third party provider fees, and more. In some cases, even though you may save money every month, refinancing does not make sense if you aren’t in the home long enough to realize the savings.

Every refinance has a breakeven point – a point in time where the costs associated with refinancing the loan are equal to the total savings. We’ll take a look at how to calculate the breakeven point later. But in some cases, the numbers just don’t add up in your favor, and you’re better off sticking with your current loan.

#3 Your existing loan has a prepayment penalty 

Some loans carry a penalty for paying off the loan early, which includes refinancing. If that’s the case with your current loan, then the prepayment penalty could wipe out any savings that may come along with refinancing. On the plus side, the  Consumer Financial Protection Bureau (CFPB) has largely addressed this issue, so many loans closed after 2013 do not carry prepayment penalties.

If you have a question about your particular scenario, you can chat one of Clara’s licensed Loan Specialists. Or see your rate quote in about 3 minutes.

Jack Grace
Jack Grace is a licensed Loan Specialist at Clara. Outside the mortgage world, you’ll find him at a Giants game in San Francisco, at the beach, or exploring the Bay Area with his dog, Lucy.
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