Why Refinancing Your Mortgage Isn’t Always Worth the Cost and Effort

You might think that refinancing is always a good idea, especially if you can get a lower interest rate. Who doesn’t want to lower their payment, right?

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Unfortunately, it’s not always worth the cost or the effort involved. Refinancing doesn’t come free of charge and it’s not without its hard work.

So how do you know if it’s right for you? You have to know your break-even point and be able to evaluate your circumstances to see if it’s right.

Refinancing Costs Money

You are going to pay closing costs to refinance your mortgage. Even if a lender tells you they can get you a ‘ no closing cost’ loan, you are going to pay, just in a different way. A no closing cost loan has a higher interest rate than if you paid the closing costs. In this case, you pay the closing costs over the life of the loan with the increase in the interest rate the lender charged.

Now, going back to the closing costs, does it make sense to pay to get a lower payment? It only makes sense if you are going to be in the home long enough to enjoy those savings. You have to figure out your break-even point or the point that you make up for the closing costs and can now enjoy the savings.

What do you need in order to figure out the break-even point? First, you need to know the total cost of the closing costs. Next, you need to know how much money you would save each month with the lower payment. Finally, you need to determine how long you plan to stay in the home. If it’s not your ‘forever home’, it might not be worth it.

Your break-even point is figured by dividing the total closing costs by the monthly savings. Let’s say, for example, your closing costs would be $4,000 and you would save $100 per month. Your break-even point would be 40 months. Once you have that figure, you can compare it to the time you plan to stay in the home. Are you on a 5-year plan, 10-year plan, or do you not have any plans to move in the future? This will determine if your break-even point is feasible and if the refinance makes sense.

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How Much Will You Save?

Now let’s look at the effort that is necessary to refinance your mortgage. Unless you use the FHA or VA streamline refinance program, you are going to have to supply many documents for the lender to determine if you are a good risk.

Just like when you bought your home, you’ll need to provide:

  • Income documents – Pay stubs, W-2s, tax returns
  • Asset documents – Bank statements and asset statements
  • Proof of employment – Contact information for your employer
  • Letter of Explanations – If you have any odd circumstances such as a gap in employment or a bankruptcy, you’ll need to explain it

You’ll also have to pay for an appraisal. The lender needs to make sure your home is worth enough for the refinance. If your home fell in value, you may not have as much equity as you thought, which could make it hard to refinance.

The refinance process can take between 30 and 45 days. How much money are you saving on this loan? Is it worth it to go through the effort? Don’t forget the fact that you’ll have a different lender to deal with when you move forward, unless you refinance with the same lender, which doesn’t happen often.

Are you willing to change your process? The new lender may require a different process for you to pay them, whether you pay online, over the phone, or by mail.

Refinancing only makes sense if you can save a significant amount of money each month. Yes, $50 a month saved does add up to $18,000 over the term of the loan, but you can also make extra payments towards your current mortgage. This could have the same effect as refinancing. If you pay the balance down, you owe less interest. You also own your home free of a mortgage faster. Sometimes this is the simpler and definitely, less expensive solution.

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