Please ensure Javascript is enabled for purposes of website accessibility
Accessibility Menu

7 Reasons Why Now Is Not the Time to Refinance a Mortgage

By Liz Brumer-Smith - Jul 28, 2022 at 8:10AM
Person appears to be thinking while counting on their fingers.

7 Reasons Why Now Is Not the Time to Refinance a Mortgage

Refinancing may look attractive, but here's why it's not

Home refinancing boomed from 2020 to late 2021. Record-low interest rates and rapidly rising home prices created the perfect storm for homeowners to cash out on newfound equity while securing a lower interest rate at the same time.

While the real estate market is still booming, the circumstances for refinancing have changed dramatically since the start of the year. If you're considering refinancing, here are seven reasons now is not the right time to do it.

5 Stocks Under $49

Presented by Motley Fool Stock Advisor

We hear it over and over from investors, "I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of "5 Growth Stocks Under $49" for FREE for a limited time only.

Previous

Next

Arrow resting atop ascending wooden blocks with percentage signs also increasing in size written on them.

1. Mortgage rates are double what they were a year ago

In January 2021, mortgage rates were at an all-time low of 2.65%. Today, rates are 5.5% -- over double what they were just one year ago. While there are other reasons people may want or need to refinance, generally, the rule of thumb is that you should only refinance if you can secure an interest rate that's at least 0.75% lower than your current rate.

Previous

Next

A person placing hundred dollar bills into the outstretched palms of another person.

2. Higher interest means you pay more over the long haul

Home prices have grown 19% over the last year, meaning homebuyers who purchased properties even in the last year are likely sitting on a lot of equity. If you refinance now to cash in on your property's equity while home prices are high, you may get a nice lump sum of money now, but you will be paying a lot more for it in your monthly payment and interest over time.

Previous

Next

Person focused while taking notes and looking at paperwork in front of a laptop.

3. Refinancing today would likely increase your monthly payment

Given we're in an increasing interest rate environment, most mortgages secured since 2008 have been at lower rates than today. So, refinancing today -- assuming you're pulling out cash from your property through a cash-out refinance -- would result in a higher mortgage payment each month because of the higher rate.

ALSO READ: Should I Refinance My Home?

Previous

Next

Two people shake hands with consultant over paperwork in an office.

4. Refinancing resets your amortization

Loans are amortized over a period of time, usually 15 to 30 years, with the monthly mortgage payment paying a portion of interest and principal in each payment. The beginning of an amortization period is mostly interest.

When you refinance your home, you are entering into a new loan at a new price, term, and rate. Refinancing resets the amortization clock and restarts the high-interest period of repayment on your amortization schedule. In other words, you pay more interest to the bank over time.

Previous

Next

Family looking at paperwork at their kitchen table.

5. The break-even point is unattainable

Refinancing to save money by taking advantage of a lower rate can eventually lead to a break-even point. That's where the money you save with the lower interest rate, even with the extra closing costs and fees associated with a refinance loan, makes up for the cost of getting the loan at first.

However, in a higher interest rate environment, the break-even point is much harder to achieve -- in most cases, it's impossible.

5 Stocks Under $49

Presented by Motley Fool Stock Advisor

We hear it over and over from investors, "I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of "5 Growth Stocks Under $49" for FREE for a limited time only.

Previous

Next

Hands holding cell phone showing credit score of 752.

6. Refinancing could negatively impact your credit score

Getting a loan or taking out any type of credit negatively impacts your credit score, at least temporarily. If you recently got a mortgage and aren't fully recovered from the impacts, refinancing could hurt your credit score further.

Although it's important to note, mortgages are fantastic for building credit over time -- so long as you pay on time each month. So, this negative impact is only a temporary one.

Previous

Next

For sale sign with the words Price Reduced added.

7. Prices are high right now but could fall in the future

Home prices are continuing their upward trend for now, but many signs point to the real estate market wavering and possibly heading for a downturn. If you refinance while prices are high, you could find yourself in a position of negative equity, owing more than the home is worth.

This was a huge problem in the Great Recession, and while circumstances are certainly far different today, it is a risk in a changing housing market.

5 Stocks Under $49

Presented by Motley Fool Stock Advisor

We hear it over and over from investors, "I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of "5 Growth Stocks Under $49" for FREE for a limited time only.

Previous

Next

A realtor and two people signing a contract to buy a home.

The only time now would make sense to refinance

In today's higher interest rate environment, refinancing likely isn't the best move. But there are two scenarios in which it could make sense. First, securing a mortgage rate that is at least 0.75% lower than your current rate could create savings over the long run.

And second, if you simply need the cash from your home and have enough income to support a higher monthly payment, refinancing may make sense. But make sure you fully understand the long-term financial impact and obligations.

The Motley Fool has a disclosure policy.

Previous

Next

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.