3 Times a Mortgage Refinance Absolutely Doesn't Pay

The interest rate you pay when you first sign your mortgage may not be the interest rate you pay for life -- even with a fixed loan. That's because you may decide to refinance your mortgage at some point in time.

When you refinance, you swap your existing mortgage for a new one with different terms. It's not the same as mortgage modification, where you change the terms of an existing mortgage.

There are plenty of situations where refinancing a mortgage makes sense. But in these three scenarios, it generally doesn't pay.

1. When interest rates are higher

Often, the purpose of refinancing is to lower your monthly mortgage payments. As such, it makes little to no sense to refinance at a time when mortgage rates are elevated, which is the case today.

The average 30-year mortgage rate as of this writing is 6.82%, per Freddie Mac. So if you're sitting on a 5% mortgage, swapping it for a loan with a higher interest rate doesn't benefit you unless you're trying to take cash out of your home via a cash-out refinance. In that case, a refinance could make sense. But unless you urgently need money, it will likely pay to wait until rates come down.

2. When your credit score has taken a beating

It may be that the interest rate you have on your mortgage is higher than the rates that are available today. If you signed your mortgage at a rate of 7.80%, for example, then refinancing to 6.82% might work out in your favor.

However, if your credit score has recently taken a hit, that's a move you should reconsider. The higher your credit score, the more favorable an interest rate you're likely to qualify for in a refinance.

But let's say your score just went from a 780, which is excellent, to a 640 because you fell delinquent on some bills. With a credit score of 640, you may not qualify for a rate of 6.82% depending on what rates look like in your area and the requirements lenders have in place. And if you get stuck with a rate of 7.65%, then it probably won't pay to refinance for the minimal savings involved.

3. When you don't plan to stay in your home for very long

Maybe you stand to lower your monthly mortgage payments by refinancing today based on current rates and your fantastic credit score. But if you're planning to move in short order, you may want to think twice about refinancing.

When you refinance, you pay closing costs that often amount to 2% to 6% of your loan. So it's important to run the numbers and make sure you'll be in your home long enough to recover those fees and benefit all in.

Let's say you're charged $4,000 to put a new home loan in place, but that saves you $200 a month on mortgage payments. You're looking at a 20-month breakeven period in that case. But if you think you might move in a year and a half, it won't pay to refinance.

Refinancing is an option that homeowners with mortgages can and should keep on the back burner. But it's important to know when it makes sense to refinance and when it makes sense to wait. If you're having a hard time affording your mortgage but it's not a good time to refinance, talk to your lender about loan modification. That could do the trick of lowering your monthly payments so you're able to stay in your home.