3 Signs It's Not the Right Time to Refinance
Should you refinance your home? Not before reading this.
- Refinancing is a way to change the terms of your mortgage loan.
- It can often save you money to refinance, but not if your credit score is low.
Refinancing a home is a major financial decision. You'll need to apply for a brand new mortgage loan, either from your existing lender or from a different one. And if you're approved, you'll owe closing costs during the transaction process, which can add up to 2% to 5% of your loan's value.
That said, while the process can be complicated and cost you several thousand dollars up front, it can be the right decision in many circumstances if it saves you money on paying off your home loan. Since your mortgage is probably your largest debt, reducing the cost of it could free up money in your monthly budget if you lower your payments, and it could potentially save you money over time as well.
However, sometimes refinancing undoubtedly is not the right choice. Here are three red flags that suggest it's not a good time for you to get a new home loan.
1. You'll be moving soon
If you'll be relocating soon, refinancing typically will not pay off. That's because the savings you can realize from dropping your interest rate really only materialize over time.
Even if you drop your rate quite a bit, you may only reduce your monthly payment by a small amount each month. It can take years for the small reduction in your monthly payment to add up to enough money to cover the closing costs you had to pay up front.
You can figure out how long you'll have to stay put in your house by calculating the monthly savings from refinancing as well as the closing costs and dividing the closing costs by the amount saved.
For example, if your closing costs are $5,000 and you save $40 per month with your new loan, it would take you 125 months -- 10.4 years -- to break even on the up front costs. If you were planning a move in the next few years, you wouldn't make back the money you spent up front and refinancing wouldn't be advisable.
2. You just changed jobs
Mortgage lenders typically want to see consistent proof of income in order to confirm that you'll likely repay your loan. A recent job change is a red flag that your future income may not be that stable -- which makes lenders nervous about your prospects of paying off the loan in full.
If you've changed jobs recently, you may want to wait until you've been at your current position for at least a year or two before applying for a refinance loan to maximize the chances you'll get the best rate.
3. Your credit score isn't great
Your credit score is also important when applying for a refinance loan. Lenders use credit score as a measure of how reliably you've paid your bills in the past -- and how likely you are to repay the refinanced mortgage loan in the future.
A low credit score could make it hard to get the most competitive interest rate on a refinance loan. And if you can't drop your rate by around a percentage point or so, it often doesn't make sense to go to the trouble or to pay the costs of securing a refinance loan.
Ultimately, if any of these three red flags apply to you, refinancing probably won't make sense. Although you could still look into your loan options, you'd probably find that waiting to refinance is a better financial choice.
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