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Though buying a home still presents one of the most straightforward ways to build equity while solving an essential life need, it’s not the safe investment it used to be. Of the roughly 80 percent of Americans in debt, a significant amount of people suffer from high mortgage balances.
Per Sambla, nearly 50 percent of Baby Boomers owe an average of $127,000 on their mortgage. Around 44 percent of Generation Xers owe an average $142,655 on their homes compared with over 21 percent of Millennials that have a balance of $144,735.
With so many Americans having equity along with mortgage debt, refinancing may seem like a sensible way to go during difficult times. But this isn’t always the case.
Here are six reasons why you may not want to refinance your mortgage.
If you’re struggling to keep pace with your mortgage along with your other bills, then refinancing could free up enough funds to get you back on track. But changing your terms comes with a variety of costs. This is because refinancing isn’t as simple as drawing up a new agreement and both parties signing on the dotted line. Rather, it involves assessing your current equity value to structure new terms.
The closing costs, as they’re known as, come in the form of a loan application fee, loan origination fee, home appraisal fee, document and recording costs, as well as potential survey and lawyer expenses. These fees will range between one and five percent of your loan value and are usually bundled into the new mortgage.
If you’re looking to refinance your mortgage, there’s no rule stating you have to stick with your existing lender. As with most financial matters, comparing rates and soliciting offers is the only way to ensure you’re getting a good deal. But doing so takes a lot of time and energy. After all, no financial institution will give you an offer without first learning a lot of details and having lengthy discussions.
Though buying a home is a commitment, it’s no reason to stay stationary if you don’t want to. If you’re not satisfied with the current rates on your mortgage but don’t see yourself staying in your home beyond the next few years, it’s probably not worth refinancing unless your lender waives some closing costs. Otherwise, you’ll probably lose money on the refinance, hurt your credit score and waste a lot of time.
Refinancing can be beneficial for homeowners whose monthly incomes are being stretched too thin for comfort. But depending on the cash-in refinance deal and how narrow your monthly income-to-expense ratio is, it may not be in your best financial interest. While lenders can be quite willing to compromise and strike a deal on a more manageable mortgage payment, nobody will ever agree to lower the overall principal loan amount. If you’re paying less per month, then you’re paying more long-term via interest.
In other cases, a debtor wants to use some of the equity they’ve generated in their home. These types of refinances are called cash-out refinances and they raise your loan balance in exchange for giving you some of your home equity in the form of cash payments. If you’re using a cash-out refinance to pay off other debts, try to secure a lower interest rate with your new terms. If you don’t, you’ll have increased your monthly mortgage payment and be paying interest on it.
Unlike the reviews of debt settlement services like Freedom Debt Relief that mention lowering debt balances through hiring a third-party company, a mortgage can’t be reduced by asking. This is because a mortgage is tied to a home (i.e., collateral) whereas credit card debt isn’t tied to anything. With a typical mortgage, it’ll take some time before you’re at risk of losing your home, but that changes with a home equity loan.
A home equity loan, or HELOC, is essentially a second loan taken out with the equity you’ve built in your home. You could be out of a place to live pretty quickly if you can’t make your payments.
If your current mortgage leaves a lot to be desired, researching different refinancing options is certainly prudent. However, in many cases, little to no money is saved in exchange for a lot of time and energy, not to mention credit score impact. As you look to remedy your financial situation, consider these six reasons as to why you may not want to refinance your mortgage.
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