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When Not To Do A Refinance

It doesn’t always make sense to refinance your current mortgage, and here are some guidelines to follow when making that determination on when not to do a refinance.

We all want the lowest rate and payment possible, but sometimes doing a refinance is not a good idea, and it’s important to make sure you’re making informed financial decisions – especially when it comes to your most or one of your most valuable assets.

Obviously, getting a great rate and a term you can afford is of super importance when making the decision to refinance. But other factors come into play as well, so it’s equally important to evaluate the big picture to make sure a refinance makes sense.

Discussing when not to do a refinance in California

When Not To Do A Refinance

You’re Moving

If you’re moving in the next one to two years, you may not want to refinance. If rates are so low, and you can lock in that rate with little to no cost, then maybe…but generally speaking, if you’re moving or about to move, then you’ll probably want to skip a refinance.

A move could cost you $5,000, $15,000, or more, so between the cost of the refinance and the cost of the move, it’s probably not the best thing to do.

Not Much Savings

This is a no-brainer – if you are not saving enough money, then don’t do the refinance. Current mortgage rates change daily, weekly, and monthly so if the rate is not low enough and there is little to no savings, then wait until rates move down.

The Payment Is Too High

You might think this is even more of a no-brainer; however, I’m referring to a situation in which a client was moving from a 30-year fixed rate to a 15-year fixed rate.  The rate will be lower; however, the payment usually is always higher, so it’s important to make sure you can afford the payment.

It’s a great thing to pay off your home faster, but the last thing you want to be is “house poor”. That’s a term that’s used when a homeowner can barely afford his or her mortgage payment and has no money left over for things like going out to dinner or vacations.

Paying Too Much In Closing Costs

We’re not big believers in paying a lot of closing costs.  It’s important to keep the costs down when doing a refinance.  If you paying points, make sure you make up the cost to buy down the rate in a reasonable time frame.  If it takes more than two to four years, you might want to reconsider paying points.

When you spend thousands of dollars on closing costs, make sure you are going to make that money back with a lower payment in a reasonable amount of time. And the only person that can determine what a reasonable amount of time it would be the homeowner.

Not Understanding The Loan Terms

If you are looking to do a refinance and switch over to a lower-rate adjustable-rate mortgage, do not do the loan until you fully understand the loan terms. Unfortunately, this is a major problem with homeowners who refinance into an adjustable-rate mortgage. If you are not clearly, 100% understand the terms of the loan, don’t do the refinance. Stick with a fixed-rate mortgage.

Don’t get me wrong; adjustable-rate mortgages are good loans in the right situations, but they require the homeowner to spend some time understanding what everything means. For example:

  • Is there a fixed rate period, and if so, how long is it?
  • When is the first interest rate adjustment?
  • When the interest rate adjusts, how much can it adjust?
  • How often can it adjust?

That is a very short list of questions a homeowner should ask the Loan Officer if he or she is considering an adjustable-rate mortgage.

You’re In The Middle Of Remodeling Your Home

This is a big no-no with mortgage lenders. Usually, when you refinance, you’ll have to do an appraisal (not always, though), and if you’re remodeling your home, that could present some issues in underwriting.  An underwriter may ask for the remodel to be finished prior to the closing of the loan.

If you’re lucky enough to get an appraisal waiver, which means you will not have to do the appraisal inspection, then you might be ok to move forward. Make sure you discuss your current situation with your Loan Officer, so he or she is best prepared.

Questions You Should Ask

When not to do a refinance in California is an important question to ask when looking at the pros and cons of refinancing. Here are some additional questions you should ask to determine when not to do a refinance.

  • What are my short-term and long-term goals for the house and the mortgage?
  • If you are improving your home: After the improvements are done, will the value of your home increase?
  • What is the highest value my home could appraiser for? This is important to ask when doing a remodel as well because you want to make sure you don’t overspend on the remodel. Your home will only be worth the highest comp in the area (or two). If the highest comps are at $400,000, then no matter how much money you spend on a refinance, the home is not going to be worth much more than that. Comparable sales are so important when it comes to home value.
  • Will I be traveling during the time frame of the refinance? If so, make sure you let your Loan Officer know.

Asking the right questions ensures you are in a better position to determine when not to do a refinance.

Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 17 years of experience as a Mortgage Loan Originator and is a trusted resource for mortgage education and information. He's licensed by the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. You can contact him at 1-800-550-5538. CA DRE #01499872 / NMLS #247447